KEYS TO ACCURATE CASH FLOW FORECASTING

Our blog last week looked at the concept cash flow forecasting and its importance, especially now in times of crisis. This week we dive deeper and look at how you can achieve more accurate cash flow forecasting for your business.

Understand your pipeline

This requires an estimate of your likely sales for the next coming months. Previously it would have been easier to project these based on history, but with the current climate, your estimate needs to be as close to reality as possible. Take into account all factors that will affect your business sales given the lockdown and the slower economic activity.
 

Identify the timing of your inflows

Once you know your estimated sales, you need to know just not when the sale will take place, but most importantly when the customers will be paying you. There may be a delay of a week or a month depending on your credit terms. Make sure you factor this delay in your cash flow forecast. Talk to your customers to get real-time information.
 

Understand your projected costs

Your cash inflows are now clear, its time to understand your outgoings. Businesses have variable costs and fixed costs. Variable costs are the ones that are linked to your sales like raw materials. Basically any cost that is directly linked to you making a sale. Fixed costs are indirect costs like rent, stationery, and internet (unless you are an internet service provider). Fixed costs are usually where cost-cutting first begins when re-evaluating your business.
It’s important to use real-time information here as well. If you have negotiated better trading terms with your suppliers, payment holidays or other reliefs affecting your costs, make sure that they are factored into your cash flow forecast.
 

Stress-test your cash flow forecast

This is where it may get a bit complex, but it’s really not that bad. This is when you play devil’s advocate and you play out several different scenarios. This is very important as it
allows you to visualise the impact of certain conditions and therefore give you an opportunity to act quickly. So, for example, you can stress your sales payment timing i.e instead of getting payments in 30 days your customers delay and pay you in 60 days, how does that change your cash flow forecast?
While your cash flow forecast will not be 100% accurate, it’s imperative for it to be as close to reality as possible. You need to have it updated constantly in order to understand how much your business will generate in the next coming months and how much working capital will be required.

If you need assistance with your cash flow forecast or any finance-related assistance, our team will be happy to assist you. Please get in touch with us here.