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What Is a Cash Flow Forecast?

An accurate and up-to-date cash flow forecast helps finance teams gauge whether the business is on track to meet expectations and help course-correct before it’s too late. Read our tips for ways to improve your cash flow forecasting process.

“Cash is king.” It’s a common business cry, but we’d venture that to be more accurate and useful, the adage should be updated to: Cash flow is king.

Recent data compiled by research firm CB Insights found that 29% of startups fail because of a cash liquidity crisis, making it the second-most-common company killer. And enterprise companies may not have it any easier: In a 2017 PwC survey, more than half of finance executives said they were concerned about the accuracy of their cash flow forecasts, collecting forecast inputs on time, and the reliability of the systems and processes used to gather the data.

What is a cash flow forecast—and why does it matter?

A cash flow forecast is an estimated projection of the amount of money you expect to flow in and out of the business over a set period of time, such as the next month, quarter, or year. It includes all projected income and projected costs, as well as estimates for payment timing.

A cash flow forecast is derived at the end of a rolling financial forecast process:

  • This process begins with forecasts of “drivers,” such as the unit-level sales volume and mix.
  • The next step is to calculate the level head count and purchasing spend to match the projected sales demand volume with capacity (i.e., expenses). Capital investments and spending for strategy execution projects and risk mitigation are then added.
  • Next, by adding pricing for the sales volume a pro forma income statement and balance sheet by period can be reported.
  • Finally, similar to the “equation” for the “cash flow statement” in the audited financial statements, the projected net-positive (invest) or net-negative (borrow) cash flow can be computed.

Understanding the definition of a cash flow forecast is straightforward enough, yet many people struggle to appreciate how truly vital the cash flow forecast is. With an accurate and up-to-date forecast, the finance team can easily gauge whether the business is on track to meet expectations—and help course-correct before it’s too late. Think of forecast variances as red flags: Accounts receivable is lagging the projection? Time to figure out why and speed those payments from customers. Expenses are inching up more than anticipated? Collaborating with that department’s budget manager can help either tighten costs or modify the forecast. It doesn’t look as if you’ll have the cash on hand to fund those expansion plans? Time to call a meeting, quick.

Whatever the variance and action plan, a cash flow forecast lets you see farther into the time horizon and smooth out any issues before they trip up the company’s operations or strategic plans. With that in mind, here are four tips for taking your company’s cash flow forecast to the next level:

Tip 1: Embrace automation

Pop quiz: How long does it take your FP&A team to generate a cash flow forecast? If it’s anything longer than a few minutes, then the odds are high that forecasting gets pushed toward the bottom of the team’s to-do list.

That was the case at Papyrus, a greeting cards and gifts retailer with hundreds of stores across the country. The finance team had been saddled with an Excel-based management model, meaning they would spend weeks manually creating forecasts and reports across 250 spreadsheets. Not only was the process labor- and time-intensive, but the FP&A team had to be vigilant against potential typos that could derail their accuracy and the executive team’s confidence in their forecasts.

Yet when Papyrus moved to a cloud-based solution, Adaptive Insights, that week-long process was suddenly handled in a matter of minutes—and with reliable accuracy. Comparing actuals to the cash flow forecast was quick and painless, allowing the company to react more nimbly to opportunities. As then CFO Tom Shaw said: “The ability to have real-time visibility into our results, analyze what the numbers mean, and make adjustments to manage cash flow, inventory, and staffing at a store level has been a tremendous advantage for Papyrus.”

Swapping a clunky manual process for smarter automation around cash flow management has even helped the company pursue expansion plans. It acquired the retail card business American Greetings, expanding its retail footprint from 160 stores to more than 500 across the United States and Canada.

Tip 2: Temper optimism with data

Like any forecast, cash flow is naturally positioned toward the future. Yet the best projections are based on the realities of past performance. Maybe the sales team is bullish on their latest round of prospects, or the product development department is certain that its new launch is going to sell like gangbusters. As part of the finance team, you know better than to let emotions drive the projections.

Dig back into past projections (an easier task by far if your finance tools automatically save and store past forecast iterations). Then, get granular with past cash flow forecasts and how the actuals aligned with the planned projections. It’s easy for other departments to optimistically remember their performance with rose-colored glasses (“We were so busy last holiday season!” “At least one-third of our subscribers renewed, I’ll bet!”). But armed with fact-based data, the finance team can drive more accuracy in future forecasts—and less last-minute scrambling to resolve issues surfaced from variances.

Tip 3: Find your forecast metabolism

Your finance team knows that forecasting is rarely a one-and-done exercise. Growth startups may find that weekly—or even daily—forecasting is essential to make sure they have sufficient cash on hand to cover immediate expenses and pursue aggressive growth. Most established companies may adjust the metabolism to weekly or even monthly forecasts.

But size isn’t the only consideration as you set the pace of cash flow forecasts. If you’re in a high-volatility business—say, spring season brings the bulk of your subscribers or your consumer packaged goods company does twice as much sales in Q4 as Q1—then more frequent forecasting may be in order.

According to a Gallup survey, almost half of businesses have predictable times of the year that are significantly busier or slower than others. And for 41% of those consumer packaged goods companies, big revenue fluctuations make it more difficult to manage cash flow throughout the year. Even when cash reserves are high, uncertainty about the next seasonal dip can make it hard to confidently shed debt, expand head count, or fund growth initiatives.

That’s why even when tweaking and reviewing the projection more frequently, the forecast itself should stretch well into the future. After all, if you just wanted a snapshot of how much cash you have on hand, you’d check your balance sheet. The cash flow forecast is about whether this cash—and any estimated inflows—will be able to drive the business into the future.

Tip 4: Tailor the detail to the audience

The company’s CEO wants to know if the cash flow forecast can support moving into another market. The board of directors wants to be made aware of any cash flow management concerns. Budget owners across the company want a warning when their actuals are falling far short of—or exceeding—the projections. And as a finance pro, part of your role is to answer those questions and calls for information with the right level of detail, granularity, and accuracy.

This is another area in which having the right cash flow management software in place can make a world of difference. Because everybody in business plans. The best plans involve the people closest to the day-to-day business. Therefore, your forecasting tool should not only be sophisticated enough to handle parsed data and granular inputs, and powerful enough to roll that info into high-level insights—but also easy to use. That means when an executive or department head wants answers, you have rich and robust analysis available at your fingertips—without having to hand over a 40-page Excel spreadsheet.

And cash flow forecasting shouldn’t be designed with only the C-suite in mind. Many CFOs think their FP&A teams could be more effective through better collaboration. Stronger data collaboration includes getting buy-in and engagement around cash flow forecasting from budget owners and department heads. And before you say, “I don’t have time for that!” consider this: Collaboration doesn’t have to mean department heads calling you with every finance question (trust us!). The right intuitive tool can be easy for nonfinance pros to understand and use, thus improving your collaboration—without clogging your inbox or voicemail with simple requests.

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