By Mary Ellen Biery
Research Specialist, Sageworks, Inc.
Cash flow forecasts, the vital estimates of how much cash your business will have to continuing operating, are notoriously tricky because the many variables involved. Even so, accountants and other financial experts say there are several steps you can take to improve their accuracy.
1. Be conservative. Be skeptical about your managers’ and your own forecasts, especially when it comes to sales and expenses. “One incorrect assumption can have a large effect on your cash flow,” says Paula Griffo, chief financial officer of VoIP Supply, an Amherst, N.Y., provider of VoIP (Voice over Internet Protocol) solutions. “I always underestimate cash inflows and overestimate cash outflows to be on the safe side.”
2. Be aware of common pitfalls. For example, since you know accounts receivable is an area that can quickly ruin your cash flow forecast, improve your AR processes. David Douglass, a partner with Atlanta-based professional services firm Tatum, recommends that as customers go past 30 or 60 days, start calling, and set and enforce penalties.“If you are the CEO, send a message to the management team that invoicing customers as soon as possible, cash collections and cost controls are the lifeblood of any business, [and] are therefore ‘everyone’s concern,’” he says. “If the CEO doesn’t take cash forecasting very seriously, nobody else will.”
3. Update regularly. Perform and update cash flow forecasts frequently enough that you’re not surprised by the updated forecast, and as a result, caught with insufficient time to response.
4. Learn from mistakes. Strive to improve accuracy by comparing your actuals to your forecast so that you can learn from the process.
5. Hold others accountable. Several experts say that while the CFO is ultimately responsible for developing and updating a cash flow forecast, sales, manufacturing, shipping, accounting and other parts of the business should be held accountable for their roles in helping to achieve the forecast. Business owners and managers can structure performance quotas to meet a cash flow forecast and manage workers to those quotas.
6. Seek advice. “Everybody wonders, ‘What’s the secret to cash flows?’ and there isn’t one,” says Lauren Prosser, manager of advisory services at Sageworks. “There’s never a black-and-white answer. It’s always a matter of sitting down, looking at what you have and some what-if scenarios, and saying ‘I’m going to try that.’” Don’t be afraid to ask your accountant for help; he or she would probably welcome the chance to be more of an advisor for your business. “It’s a thought process, and someone has to walk you through it,” Prosser says.
7. Seek automated help. Cash flow forecasts are typically a standard part of budgeting or business modeling applications. “If you are considering an upgrade to your business modeling/forecasting processes, be sure that any applications being considered provide an integrated cash flow forecast that ties to the income statement and balance sheet,” says Douglass.
Mary Ellen Biery is a research specialist at Sageworks, a financial information company and maker of the ProfitCents suite of financial analysis applications. She is a veteran financial reporter whose works have appeared in The Wall Street Journal and on Dow Jones Newswires, CNN.com, MarketWatch.com, CNBC.com, and other sites. She received her undergraduate degree from Wake Forest University, where she graduated cum laude, and her master’s degree from the University of North Carolina at Chapel Hill.
Sageworks’ solutions for cash flow analysis and projections: http://web.sageworksinc.com/cash-flow-projection/
JaxWorks Small Business Spreadsheet Factory: Has downloadable worksheets for weekly cash flow projections, 12-month cash flow forecast, etc. http://www.jaxworks.com/library.htm
How to Read a Financial Report, by John A. Tracy, John Wiley & Sons, 2004. http://books.google.com/books?id=Xzd3-NojmkgC&printsec=frontcover#v=onepage&q&f=false
Articles on Cash Flow Forecasting from the Government Finance Officers Association: http://www.estoregfoa.org/StaticContent/staticpages/TM0407.htm#1a