Accounting

What is a Cash Flow Forecast, and How Is It Used?

By December 11, 2018 No Comments

Cash Flow ForecastThe end of 2018 is fast approaching, and the pace is becoming more frenzied.  More things to do, more deals to close, more loose ends to tie up before we evaluate whether the year has been a success.  Companies are focused on finishing strong and planning for 2019. While creating business plans and budgets are essential tools to stay on track, businesses should also be creating cash forecasts to help bridge the gap between their plan and reality.   When customers don’t pay on time, you have to purchase inventory in advance of the holiday rush, your CRM requires an annual upfront payment, and your estimated taxes payments are due, the strain on businesses to manage their cash flow is real and stressful.   

Companies on accrual accounting are creating budgets with waterfall revenue schedules and smooth expense trend lines.  We want our revenue and costs to line up so we can see profitability and where to adjust our cost structures. A budget is a roadmap that will get you from point A to point B if you make the right turns at the right time.  However, when that timing doesn’t line up, a cash forecast can help navigate during tighter times and make sure you can prioritize where needed. Cash is the fuel of a business, and good cash forecasting will eventually dictate whether your business survives the unexpected.  

In contrast to a budget or a financial forecast, a cash forecast is short-term and nuanced.  It deals with the here and now and is as much about business relationships as it is transactional data.   Knowing what is and what is not negotiable and how to react when that big invoice doesn’t get paid on time.  If your budget or plan is like a roadmap for a well thought out trip across the country, your cash forecast should help make you feel like you are taking that trip on a Segway.  It should be able to pivot and shift to navigate obstacles in your path. Some adjustments are swift & severe while others are more subtle. Since the data changes with each day you do business, it is a living process that needs to be continually updated, evaluated and improved.   

Lucky for us there are new tools on the market like Float, Finagraph, and PayPie that help make cash forecasting easier and much more real time.  Integrating with customer and vendor transaction data from the accounting system is a huge time saver and improves the accuracy of your forecasting. Layering the inside scoop of your business on top of that data creates a solid tool for making sure that you stay on top of competing priorities.

If you are new to cash forecasting or unsure where to start, we can help.  Acuity’s Controllers help companies by providing meaningful financial information to help businesses make good decisions.  Commit to making cash forecasting a priority and less stressful so that 2019 is a success.