Forecast for success: Keys to increasing your cash flow accuracy

There’s no denying the importance of accurate cash flow forecasting. But does everyone involved understand just how far reaching the benefits are?

After all, when you have reliable cash flow forecasts, your company has:

• an early warning system for potential cash flow woes
• a way to test the viability of new products, ventures and markets
• a method to determine borrowing needs
• confidence you’re making the best use of your cash, and
• a seat at the table for all strategic business decisions.

That was the message at a standing-room-only session at the recent Association for Financial Professionals conference in Washington DC.

With so much to gain, it makes a compelling case to devote some serious attention to your forecasting approach.

Less than 1 in 3 feel forecasts are accurate

It seems there’s plenty of room for improvement. Fewer than a third (32%) of your peers would classify their current cash flow forecasts as “accurate,” according to a survey by Kyriba. Not a single finance exec was willing to say they’re very accurate.

The reasons why vary, but the main ones are: lack of visibility into all forecast data inputs (65%), lack of communication with business units (20%) and lack of time and resources (10%).

With no shortage of problems, what are the best solutions? Here are two of the best places to start.

The what and the how

First consider the main cash flow types you need to be including:

1. Streaming: daily operations
2. Recurring: regular events, such as payroll, and
3. Discrete: one-off transactions where the amounts and dates can shift.

Once you’re confident your organization is including all the data it needs for a complete picture, reconsider the method you’re using to get that picture.

The experts at AFP also outlined three different approaches companies might take to put together their cash flow forecasts:

1. A top-down method. Start big here. You’d begin with a large number and then spread it out over time.
2. A bottom up approach. Take your daily forecasts and then feed them into the larger strategic picture.
3. An analogous approach. This method would be based on similar patterns (time, seasonality, etc.) that’s important for uncertain cash flows. Note: You need strong actuals for this method.

Of course there’s no one-size-fits-all choice. Your company may use one or a combination of these.

The key: Having the flexibility to try a different approach when one isn’t giving you the accuracy or visibility you’re after.

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 theAssociation for Financial Professionals annual conference in Washington DC.