Cashflow forecasting is a process that requires tremendous data inflows. Multiple streams of various data packages that are inherent for different layers of business come together to form a coherent whole. The endemic problem that these forecasts suffer, however, is that they are consistently prone to mistakes. Inaccuracies notwithstanding, cash flow forecasting still remains one of the most important ways, a corporation can rectify its own cash deficits. Since strengthening the levels inside a company for better cash flow management should not just be a priority for struggling enterprises, organisations rife with cash can also utilise cash flow forecasting to better tighten their share of dividends the market offers. Here are a few challenges that are part of cash flow forecasting and how to get around them.
Common Mistakes During Cash Flow Projections
Not having a dedicated team
Delegating cash flow forecasting to junior employees who lack the experience and understanding of the company’s finance could be a recipe for disaster. Overburdening your senior staff is neither the answer to this issue. The best way to tackle this is by assigning a small team specifically tasked with cash flow duties who are well aware of the company’s history and have knowledge about the industry your business operates in.
Not having the entire organisation on board
An open communication is the secret to the success of any cash flow forecasting. Keeping the entire company in the know about the cash flow forecasting will help ensure the accuracy of the forecasting and can be even more beneficial with the constant reviewing and feedback of the tentative projection from the heads of every team in the organisation. The management team in particular should review the forecast and ensure that their initiatives are included.
Not using accurate data
It is imperative to ensure that the information used when charting a cash flow projection is current and up-to-date. Experts advice a weekly review of numbers to make sure that the company does not overlook any changes in the cash flow patterns at present. A weekly review session of comparing the numbers with the projection and adjusting the values is the best way to get around this issue. The cash flow projections may be a little off at first, but with some practice this will become fairly straightforward. To further ease the implementation, using a robust cash flow forecasting tool can automate and streamline this exercise as a process within the organisation.
Erroneous estimation of business parameters
This is one of the most common and primary reasons for errors in business cash flow projections. A cash flow forecast should always be supported by historical data and ample research. An over-the-top sales projection can lead to a shortfall of cash while an underestimation of the likelihood and impact of negative events can adversely affect the business. A company must always chart out “what-if” scenarios and put them to the test to be prepared for any potential impact, be it positive or negative.
Ignoring tax liability
Tax liabilities are another source of variability in projecting cash flows. With the continually evolving tax system, businesses may not be aware of every single change in the tax regulations. Hiring a tax consultant becomes very important in such scenarios as they can help you avoid any issues related to your company’s taxes. Being prepared and knowing the organisation’s tax liability can better structure your cash flow forecasts.
Not accounting for cash flows from financing and investing activities
This requires a relatively high-level understanding of GAAP and IAS standards and principles from the team predicting these. Even if you have an experienced team in place, it can still be a rather difficult task. It is best to deal with this by setting policies and then following a strategic plan when it comes to acquisition and disposal of long-term assets and any other investments that can impact the organisation’s equity and borrowings.
Failure to make space for changes in receivables and payables.
When chalking out a projection, external analysts often tend to simply grow A/R and A/P with sales since they do not have control over the policies. But as one of the primary decision makers of the company, a CFO or somebody from the C-suite can set a Days Sales Outstanding level, then stick to it. This holds true for accounts payable as well. Organisations should set optimal accounts receivables and payables standards through corporate and financial strategy. This can then be used to forecast those accounts according to their plan.
Everything affects cash flow in a business, and without it, the company, no matter how small or big, cannot thrive. Keeping a close eye on the organisation’s cash flow and forecast as realistically and meticulously as possible is the key to a successful cash flow projection. Make sure it is at the top of your organisation’s priorities to ensure your business runs smoothly and has the sufficient funds to continue growing.