Doing a cash flow forecast that really works

You operate in a world that is constantly changing, where the future is difficult to predict. Your weeks are bogged down with scheduled meetings and to-do’s. With all of these demands pulling you in different directions, you might begin to ask yourself: how important is it to compile a regular cash flow forecast? After all, how accurate can a cash flow forecast be in an environment that is subject to constant flux?

The answer is: still very. The need to project cash flow needs for your business remains paramount to being a successful financial manager. This is despite the other pressures you face, and the changing environment in which you work. In fact, in some ways, it becomes more important because of these factors.

The differentiator is to spend your efforts compiling a cash flow forecast that actually works.

Here are a few pointers as to how you can do that.

1. Make sure your assumptions are realistic.

If your projections are too optimistic – or too pessimistic – the exercise of forecasting becomes futile. Within the first few weeks of your cash flow forecast, test it against your actual cash flow to see how accurate you are. If there are gaping holes, identify why they’re there. Did you forget to include absolutely all of your expenses in the forecast? Did you overlook a promotion that the company is running during this time? Change your assumptions as often as you need to ensure you stay on track.

2. Refer to your cash flow forecast regularly.

You’re so caught up in the humdrum of every day requirements that it might be difficult to fit in the time. But if you really want your cash flow forecast to work for you, make the time to review this document often – more often than you might want to! Schedule a set time in your calendar, put a reminder on your phone, and ask your PA not to book any meetings during this time. If you have a set, regular time that you are checking your forecast, you can identify cash needs in advance, and alter them against reality. When the business will be experiencing a trough, you can apply for finance or try to attract extra investment in good time.

3. Start with baby steps.

Start by producing a four-week cash flow forecast. Review it regularly for accuracy. Once you are comfortable with the accuracy of your month-long forecast, compile an eight-week cash flow forecast. Then move on to a 12-week projection, and so on.

4. Make allowance for seasonal fluctuations.

Remember to include seasonal and environmental factors in your forecast. So for example, when preparing for the cash flow forecast of the second quarter of 2011, your company would not simply have been able to base its projections on the historical data provided by the second quarter of 2010. That period of 2010 saw the Soccer World Cup come to South Africa, and with it, there were abnormal patterns in sales and consumer behaviour. Be mindful of the upcoming “irregularities” such as seasonal events, anticipated strikes or wage negotiation periods and, of course, the impact of power fluctuations caused by load shedding!

The more regularly you review, contrast and update your cash flow forecast, the more invaluable it will become. With its help, you’ll be able to maintain the most optimal levels of cash for your company, saving on excessive stock costs and ensuring that your business has the most appropriate finance in place for its needs at any given time.

If you need assistance putting together a cash flow forecast that really works for you, get in touch with The Finance Team. Our highly experienced finance executives can come into your company to provide ad hoc or part-time assistance as you require it.

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