3 Keys to Cash Forecasting

by | Aug 10, 2021 | Emerging and Growing Business

Close Up View Of Bookkeeper Or Financial Inspector Hands Making

If a healthy and successful business is your goal, then cash forecasting is your map to get there. This is something outsourced CFO services can help with. Cash flow forecasting is your master guide to the money flowing in and out of your business, across all areas, and it has to be accurate and timely in order to be of any use. This valuable sheet of data is a powerful tool in organizing your business’s finances and ensuring that you will always have enough to pay your bills.

If you’ve ever managed a checking account or waited until your paycheck arrived to make a purchase, you already understand the basics of cash flow forecasting. For corporations, however, managing and forecasting cash flow gets a lot more complicated. Though the concept itself is relatively simple, cash flow forecasting touches on every business area – inviting a world of complexities that your finance team must sort through to maintain the best cash forecasting processes.

Consider the following when analyzing your business’s approach to cash flow forecasting:

Why is cash flow forecasting so important for your business? 

Cash flow forecasting uses concrete financial data to predict your company’s ability to pay for its outflows with the inflows. In the long run, complete and accurate forecasting can suggest some serious implications about your company’s future – and provide insight as to where you may need to cut expenses in order to be able to keep up with your bills in the long run.

  • Legalities: Do you have enough cash for payroll? For payroll in a month from now? Do you have enough cash to pay outstanding loans? If you lack the liquidity to cover these critical expenses, you may end up facing legal ramifications.
  • Performance: Does your company rely on postponing the payment of invoices at the end of the year? Is there enough accessible cash to ensure vendor goodwill and bonuses for your employees? These intangible assets affect the cost of doing business and your relationship with your employees – and could impact the cost of continuing to do business.

With these aspects in mind, along with the weight they carry in regards to your decisions and financial forecasting process, is integral when it comes to cash flow management.

Next, let’s take a look at key steps to a reliable cash forecasting approach that can streamline your process, whether you manage the finances of an individual, small business, or large company.

Step 1: Fine-tune or redefine your cash forecasting goals. 

For this first step, revisit your business manifesto or creed to and define your company’s top priorities. Though a more situation-specific analysis on a departmental level may be necessary, the following goals should drive your approach to cash flow forecasting.

  • Establish smooth daily operations. Your company’s core functions cannot be performed without capital. Without reliable capital, you don’t have a company. This is why finance teams are such an important cog in the symbiotic relationship of teams and individuals working together to make a company run. In other words, your company can only stay afloat if your cash flow allows the following:
      • Short-term and long-term liquidity for the company’s operations
      • Pay your liabilities on time (payroll, dividends, interest)
      • Fulfill covenants to keep trust with lenders
  • Maintain lasting relationships. Depending on whether a corporation is publicly or non-publicly traded, cash flow forecasts will be made available to the shareholders for the former and key stakeholders for the latter. In other words, potential business partners considering a joint venture need evidence that your company is financially sound. Accurate accounting and cash forecasting of inflow and outflow is the best representation of your company’s financial health, and it may actually lower the cost of doing business.
  • Drive company decisions based on data. When all is said and done, cash flow projections are your insight to your company’s profitability – and this provides the preliminary data for long-term business decisions. If your cash flow projection has been largely positive for several years, you have to decide how to best utilize those assets for the growth of the company. Will you expand operations? Acquire another business location? Buy back shares? And on the other hand, suppose your cash flow forecasts show shrinkage. How will you cut expenses to make up the difference and keep operations going? These decisions need to be made with the cash forecasting data that shows you can actually follow through with your business intentions, otherwise your business may end up in the red.

Step 2: Use the right forecasting strategy to increase accuracy. 

There’s no formula to the perfect cash forecasting, but weighing your options and considering your company’s unique needs can greatly improve your accuracy. Here’s what you should consider:

  • Time parameters: Will your forecasts be daily, weekly, or monthly? Small businesses may benefit from cash flow projections every day, whereas large corporations may forecast monthly or quarterly. Outsourced CFO services are invaluable because small business owners often don’t have time
  • Variance analysis: Cash flow is an art, not a science, and sometimes your forecast may be different than your actual cash flow. If you experience a consistently large variance between your projections and your actual income, then it’s time to reassess your model.
    • Tip: Variance can fluctuate, but a variance around 5% and no greater than 10% is generally considered healthy.
  • Feedback from the end user: Forecasting requires a large amount of data, but how it will be used and who will be using it determines whether or not it is ultimately effective. To assess the functionality of your forecasts, the data must be tailored to the end user and the end user must subsequently provide feedback. You can keep the greatest financial records in the world, but if they are useless to the end user, they certainly won’t benefit your business.

Step 3: Streamline your banking structure. 

The banking setup for an established Fortune 500 company is going to look a lot different than for a small start-up. Consider the following factors:

  • Fees/Sweeps: When you set up a banking structure, you’ll need to analyze the fees associated with that banking structure. Conversely, sweeps may be an ideal way to earn interest on cash.
  • Foreign currencies: Does your business operate in foreign country? Do you need banking accounts that accept foreign currency?
  • Controlled disbursement accounts: This option works well to tightly control your cash flow. The structure allows you to understand tomorrow’s cash position by the end of today, which is helpful to small companies without reliable cash reserves.

Taking the steps to optimizing your company’s cash forecasting is the way to reach your business goals. We hope this easy guide will help you start or revise your current system so you can start seeing results.

Outsourced CFO Services

Do you need outsourced CFO services? Call Unalp CPA Group today at (925) 574-8855 and let us show you how we can help transform your business to optimize its success.