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The essential discipline of cash flow forecasting

The essential discipline of cash flow forecasting

Posted by Juanita Potgieter on 22nd Jun 2020


Every business owner knows that cashflow is the lifeblood of operations. Run short or run out or cash and things grind to a deeply unpleasant halt – and that applies whether running a multinational business or a mall kiosk. That’s what makes simple, go-anywhere cashflow forecasting so attractive.

While predicting the future is notoriously difficult, having some sort of idea of what to expect is crucial for every one of us in our personal lives. It’s just as important for your business – after all, that’s why you have a strategy and a plan. Sure, ‘the best laid plans go oft awry’, but that’s where tactical manoeuvres come into play: strategy is the broad outline, tactics help adapt at the minute occurrences with the wider whole.

Managing cashflow effectively is both a strategic and a tactical discipline. Forecasting fulfils the strategic role, providing a longer-term view on anticipated conversion of inventory and work completed into cash (the cash conversion cycle).

Tactical interventions are introduced in response to ‘actualities’ which weren’t or couldn’t be anticipated in the strategic view. These interventions could include raising new loans should cashflow run short, or, in the case of surplus cash, purchasing additional inventory, adding staff or other growth-oriented actions.

Performing cashflow forecasting is necessary because it acts as a radar, detecting and identifying potential cash balance shortfalls before they become an issue for your business. This provides space for the tactical actions, and is the crux of the cashflow forecast. It’s the wiggle room consistently keeping your business in a position to pay suppliers and employees and meet other obligations.

Cashflow forecasting serve another important role: it helps manage the cash conversion cycle by identifying how quickly (or otherwise) customers pay their bills. Naturally, when customers pay on time, it means money in the bank and a rosier forecast.

If you’re running a start-up or any sort of entrepreneurial initiative where capital tends to be in short supply, managing cashflow is a crucial activity. It’s for this reason that in these kinds of operations, cashflow forecasting is routinely done every day. Cash is king, as they say, and managing it very closely typically means the difference between success and failure. Most who have been in this position with a new business (or one undergoing difficulties) know that it isn’t even a daily issue, but one constantly on your mind.

Banks, too, take an interest in cashflow forecasts, particularly when looking at new loans, or servicing existing ones. After all, your anticipation of income and money on hand is directly related to your ability to make repayments.

The reasons for good cashflow forecasting are, clearly, sound.

The problem for many businesses isn’t recognition of the necessity or value of the discipline, but rather the availability of good tools to do it well.

For many, the standard tool is a spreadsheet. While spreadsheets do a decent job of keeping track of various things, the problem is that a cashflow forecast is made up of a lot of moving parts, generally including inputs from accounts payable and accounts receivable. That’s because at its core, cashflow forecasting depends on showing all cash coming in (from all sources), and all cash going out within a defined period.

If the forecast is to be of any use, it should accurately reflect how much is coming in and going out, and the timings of those transactions – and bear in mind that anticipating payments is an inexact science. While we all love a customer who pays on time, in other words, experience tells us those can be in the minority!

A better tool for cashflow forecasting is one which is automated, updates as soon as new information (such as a payment, or a new liability) is introduced, and above all, one which is accessible and delivers clear information whenever you want it. That could be weekly, monthly or in the five minutes you have in between meetings.

And that’s what we’ve been working on for our MYOB Greentree users – we’ll go into more detail in the next blog.