Cash flow forecasting is a critical part of financial planning for a business of any size. The ability to accurately project future cash inflows and outflows can help businesses anticipate short- and long-term financial circumstances, identify trends and make more informed strategic decisions.
Getting it right is a mixture of both art and science.
The following steps can help:
1. Leverage Modern Technologies for Better Data and Reporting
New financial technologies can play a significant role in improving cash flow forecasting. Automating workflows and reducing the potential for human error provides organizations with a more accurate picture of their financial health.
This is particularly important for businesses dealing with large amounts of data, where manual requirements are likely to produce more errors and slower cycle times.
2. Embrace a Data-Centric Model
Not surprisingly, accurate data is one of the key ingredients to improved cash flow forecasting. Businesses should collect and analyze as much data as possible in order to get a complete and accurate model of their financial health. This includes data from both Accounts Payable (AP) and Accounts Receivable (AR).
Together these two components can provide the information necessary to make informed cash flow decisions. For example, with modern AP automation tools, finance teams can use real-time data from invoice capture instead of waiting for payments to be processed to the ERP system.
3. Be Agile in Your Approach and Update Cash Forecasts on a Consistent Basis
Today’s business environment requires companies to be able to quickly pivot their strategies. In order to do so, they need real-time insights and information. Regularly updating cash flow forecasts ensures that the model always remains accurate and relevant.
It also enables companies to adjust priorities accordingly. For example, in cases where it may be important to have money on-hand, companies can leverage AP analytics tools to explore the effect of a higher Days Payable Outstanding (DPO) on their bottom-line.
4. Reduce Late Payment Fees
One of the easiest ways to improve cash flow forecasting is to reduce late payment fees and interest charges. These costs can stack up over time and negatively impact a company’s bottom-line.
Thankfully, they are easily preventable with modern AP automation tools which provide complete reporting with payment history, AP trial balance, and AP aging. This information identifies missed payments and prevents late payment fees going forward.
5. Use Different Forecasting Ranges
Using both short-term and long-term forecasting timeframes can provide different insights into a company’s overall financial health. While short-term forecasting helps with immediate cash needs and potential short-term liquidity issues, long-term forecasting delivers insights into a company’s financial health over an extended period and can help identify potential long-term liquidity issues. Teams must evaluate both to ensure they are financially secure in both the immediate and distant future.
6. Improve Visibility into the Financial Process
For companies who have not automated AP, it can be difficult to distinguish between paid and unpaid invoices. This results in added stress and disorganization for the AP team. Meanwhile, finance teams embracing automation and analytics tools gain full visibility into their overall payment workflow. This clear view into the financial health of the organization ultimately leads to more accurate cash flow forecasting.
7. Reduce Duplicate Payments
Duplicate payments can quickly add un-forecasted expenses to the balance sheet and disrupt planning. They can also be easily avoided with a modern AP automation tool which automatically flags duplicate payments before they sneak their way to payment approval. This minimizes the likelihood of duplicate payments and improves overall cash flow forecasting accuracy.
8. Make Sure Your Model is Reliable and Accurate
It’s important that the model used for cash flow forecasting is reliable and accurate. Forecasting models are built on specific assumptions and it’s crucial to monitor the differences between actual and predicted spend to improve the model. One way to do this is to regularly compare your actual cash flow with your forecasted cash flow and to make adjustments as needed.
For example, consider a company that sells seasonal products. The company’s financial model may assume that sales will be higher during the holiday season and lower during the rest of the year. However, if the company experiences unexpected weather patterns or changes in consumer behavior, actual sales may differ from what was predicted.
In these cases, it’s important for a company to regularly review its financial model and make adjustments to ensure that its predictions remain accurate and can account for worst-case scenarios.
Accurate cash flow forecasting is a critical aspect of good financial management. By embracing the steps outlined above, finance teams can provide the business with the information it needs to make effective short and long-term strategic decisions.
Jose Garcia is the Director of Product Management at MineralTree, where he oversees various product functions and leads MineralTree’s Data Analytics program. Before joining MineralTree as a Product Manager, Jose was an auditor at Deloitte, which kickstarted his career into product management. Jose holds a BSBA and MBA from Boston University Questrom School of Business.
Like what you're reading?
Subscribe to our FREE newsletter and we'll deliver content like this directly to your inbox.