2 in 3 cash flow forecasts are inaccurate – are yours?

Quick: How accurate would you say your company’s cash flow forecasts are?

If you said “somewhat accurate” you’d be in good company – more than half (53%) of companies admitted their current forecasts fall into that category. And another 8% admit they are “very inaccurate.”

That’s the finding of a recent survey by Kyriba.

Which makes it no surprise that a session on improving the accuracy of cash flow forecasting was standing room only at last week’s Association for Financial Professionals’ annual conference in Washington DC.

CFOs from all over the country filled the ballroom to find out how they can improve their own forecasting process. Here’s what they learned.

Why it’s so important

There’s no shortage of benefits to working from accurate cash flow forecasts:

• It’s an early warning system for potential cash-compromising issues.
• You can test the viability of new products, ventures or markets.
• You’ll better determine your borrowing needs.
• It can ensure you make the best use of cash, and
• It helps inform all strategic decisions your organization makes.

That begs the question: How can you make your forecasts more accurate and more reliable?

4-step strategy boosts your accuracy

The experts at the AFP session identified a four-step strategy to help financial execs and their departments boost the accuracy of their forecasting. Hopefully you can use it to improve yours as well:

1. Determine your objectives. You can’t tackle everything at once. But if you crystallize what you hope to get from your forecasts, that will help you prioritize your areas of focus. A great question to ask to hone that focus: What’s surprising us in our existing forecasts?
2. Understand patterns. This is a three-step process: 1. Gather inputs that feed into your forecasts. 2. Assess the causes and effects. 3. Report your cash flows. From there, patterns should emerge that will show you where potential shortcomings lie.
3. Choose a method for forecasting. You have multiple options here, from top-down to bottom-up to analogues. To select the best one for your company’s needs, see what data you can feed into your system. There may be other departments outside of Finance that has helpful info. Then don’t be afraid to recast or extend your forecasts for a clearer picture of your cash flow. You might even find you need a brand new forecasting method altogether!
4. Manage expectations. This is critical to get people outside of Finance to offer up data for forecasting. Some departments may be hesitant to contribute to forecasts because they aren’t 100% confident their data is reliable. But complete certainty isn’t necessary to get closer to accurate. You need to reassure people of this so you have access to all the pieces of the puzzle.

Info: From the presentation “Improving the Accuracy of a Cash Flow Forecast” by Chris Jagers, Cash Flow Forecasting Process Owner, Nationwide Insurance and Lynda Umbreit, Vice President, KeyBank, at the Association for Financial Professionals annual conference in Washington DC.