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Avoid cash flow catastrophes: Part V – 7 tips for better forecasts

Mary Ellen Biery
May 1, 2012
Read Time: 0 min

Cash flow forecasts, the vital estimates of how much cash your business will have in order to continuing operating, are notoriously tricky because of the many variables involved. Even so, accountants and other financial experts say there are several steps you can take to improve their accuracy.

Paula Griffo

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 respond. 

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 can manage workers to those quotas.

Lauren Prosser

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.

See other posts related to this topic here:

Avoid cash flow catastrophes: Part I

Part II: Cash flow forecasting 101

Part III: How often should you update?

Part IV: 10 ways forecasts can go wrong

 

Additional resources:

Sageworks’ solutions for cash flow analysis and projections: http://web.sageworks.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

About the Author

Mary Ellen Biery

Senior Strategist & Content Manager
Mary Ellen Biery is Senior Strategist & Content Manager at Abrigo, where she works with advisors and other experts to develop whitepapers, original research, and other resources that help financial institutions drive growth and manage risk. A former equities reporter for Dow Jones Newswires whose work has been published in

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About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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