Accurate Cash Flow Forecasting: A New System for Finance Teams

No business can be successful without cash flow. It is vital for all aspects of the business from paying employees to keeping the lights on. Despite this, finance teams have often neglected reporting and forecasting, letting it tick over in the same way it always has. It works, so why change it?

Well, all too often these processes utilise simplistic methods, such as spreadsheets. This ignores the multiple benefits that more technologically advanced processes can bring, most notably far greater accuracy. More accurate forecasts will help businesses in many ways, from securing funding from banks or investors to identifying future shortfalls. While rethinking how to approach cash flow forecasting will always be relevant and beneficial for businesses, in today’s uncertain climate of business instability due to COVID-19, it is especially important. 

In fact, cash flow forecasts are almost useless if they are inaccurate and it is only the businesses with accurate forecasts that will flourish. Accurate forecasts allow businesses to run predictably, generate funding and make informed decisions on capital investment. In contrast, inaccurate forecasts can lead to potentially devastating outcomes. At the lighter end of the scale, an inaccurate cash flow forecast can result in missed opportunities while the business had surplus cash in the bank. Whereas, at the heavier end, an inaccurate forecast could lead to overtrading and the end of the business. It is clear that this must be avoided and remedied, but how? Andy Campbell, Global Solution Evangelist at FinancialForce, shares an alternative method with Finance Monthly.

The Difficulties

Although popular, the spreadsheet presents many issues as a tool for cash flow forecasting. The first of these is that future income and future expenses are typically completed in monthly increments. This is an issue because it means that the future is generated using data from the past so by the time the forecast has been generated, the data is out of date and, therefore, no longer accurate. Another issue is that it takes a lot of time to assimilate data from the many different sources required for this process which causes further delays. A solution to this problem is that all data from each department be made visible to the finance teams so that they can create an accurate and real-time data set.

A well-built data set will become the foundation for accurate forecasting, so it must be able to process the variety of data produced by each department. This is because companies generally process a combination of both product and service-based revenues. Therefore, the data set must be able to manage both of these sources and their different payment structures.

Although popular, the spreadsheet presents many issues as a tool for cash flow forecasting.

Volatility presents another difficulty to be reckoned with. As the current pandemic has shown, volatility can come in unexpected forms and not all can be protected against. However, preparation is key, and some volatility is more predictable. For example, businesses themselves are volatile by their very nature with the changing of business models in line with the latest developments. Therefore, it is to be expected that business revenues would also be prone to volatility. This can be mitigated against by ensuring that all data has human oversight and is regularly reviewed. Doing so will ensure that any projection is in line with the company’s strategy and should prevent unexpected outcomes.

Cash flow forecasting comes hand in hand with revenue forecasting, which is the greatest of all these challenges. Revenue generation crosses all departments: starting in marketing, it is then delivered by sales, realised by operations and, finally, measured by finance. As already stated, the collating of data from multiple departments is tricky, revenue generation crosses all departments so presents a tangible difficulty here. Currently, the typical finance department addresses this using a complicated interlinking system of spreadsheets which often presents further problems. Another issue is that there can be disconnect between departments where a lack of trust means that data is not readily shared. To solve this, businesses must remove the culture where each department treats its goals separately rather than looking at one overarching goal and working together.

How to Overcome These Difficulties

The problems can be broken down into two main categories – technology and people. In terms of people, this comes down to the business culture and only a business that can successfully change its culture will be able to successfully implement new technologies. It is very important that employees are properly briefed and trained in the new processes or technologies that businesses want to implement so that they feel part of the processes and are adequately prepared. Simply enforcing a new process and expecting it to be a success will not work and there will be no visible improvements to the business.  Successful change to a business culture, at all levels of seniority and across all departments, will result in more tangible improvements.

In regards to technology, the days of spreadsheets are over, it is time to retire them and let new technology take over. Finance needs to have clear and direct visibility into active opportunities to be able to generate accurate cash flow forecasts. A simple way to do this is to integrate the CRM with finance which will give a window directly into the required processes. The data set can be further strengthened using data from the past, for example past win rates and payments can indicate what the future may hold. AI can analyse historic data sets to identify customers who were slow to pay in the past and, therefore, are likely to be slow to pay in the future.

Ultimately, the more integrated a business is, both in terms of people and technology, the more smoothly it will run and the better its outcomes will be. Having a finance team that can produce accurate cash flow forecasting and a business reaping the rewards is not as difficult as it may seem. There are tools and technologies to help along the way. It is time to say goodbye to spreadsheets and to embrace the new way to approach cash flow forecasting.

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