Could You Benefit From a Cash Flow Forecast Process

Why Are Timely and Accurate Cash Flow Forecasts Important?
 
Cash is king!

We have all heard this phrase before and it has different meanings to different people. The first thing that comes to my mind is that a company’s survival often depends on the ability to generate and manage cash. Do you have the cash flow to weather a storm, expand, make a strategic investment, or simply meet the ebbs and flows of weekly working capital needs?

A cash flow forecasting process that is timely and accurate can help you plan ahead for these cash needs and ease the stress on business owners of running out of cash. This is a pretty, obvious benefit of cash flow forecasts, but some less obvious benefits are as follows:

• Learn more about the operational flows of your business, customers, and suppliers that will not only improve your cash flow, but also your business performance
• Improve communication across departments throughout the revenue and cash cycles
• High growth often comes with declines in cash – understand the cash barriers of growth and plan for it
• Identify issues quickly and adjust
• Focus on liquidity needs before you are forced to do so in distressed situations
• Inadequate cash flow is one of the most common reasons bankers tell me that loan requests get declined

How Often Should Companies Do A Cash Flow Forecast?
 
Is Cash Keeping You Up At Night?

This is the first thing that I would ask when determining how often a company should do a cash flow forecast. If the answer is yes, then you should likely utilize a standard 13-week forecasting process.

A 13-week forecasting period is often used as it’s the number of weeks in a fiscal quarter. The forecast is done in weekly intervals and is rolled forward after each week of actual results. Regardless of your stress level, this process has the following benefits:

• Weekly interval helps identify potential real-time cash needs and maximize the time to plan for solutions
• Learn more about relationships with key customers and suppliers
• Drive internal focus and improvements in inventory management, sales collections / credit terms management, and purchase discount management
• 13 weeks is the minimal time I recommend to properly plan and secure alternative funding sources in an organized manner

Even though the focus may be on the next quarter, I recommend that the forecast extend beyond the next 13 weeks, at some level, for a period of 6 months to 1 year. This time frame is long enough to provide reasonable projections of cash needs for initiatives and seasonality, but not too long where uncertainty outweighs the benefits.

What if I have a strong cash position?

I target two months of operating expenses in cash and zero utilization on a line of credit. Only at this point, would I recommend forecasting on a monthly interval (versus weekly) for 12 months and potentially only updating the forecast on a quarterly basis. However, you should always keep a weekly eye on cash balances and sales pipelines for any disruptive changes.

Below this target, I recommend the 13-week forecast process. However, if you are comfortable with your cash position or other funding sources, then you may consider a monthly interval (for 12 months) and monthly updates to your forecast.

If your business can benefit from the expertise of a trusted business advisor, who creates financial and goal clarity to increase cash and profitability through the development of a cash flow forecast process, get in touch today.