If you have cash in the bank, you can avoid failing as a business. Poor planning is one reason companies run out of money. Forecasting your company’s cash flow is critical to maintaining positive cash flow—changes in variables, timing, and risky assumptions can cause inaccuracies.

Cash Flow Forecasting Mistakes

cash flow forecasting mistakes

Having an accurate cash flow forecast is key to making the right business decisions; however, few are confident with their accuracy. Kyriba surveyed several treasury professionals and their responses reflected this truth: Cash flow forecasts are essential but lack accuracy.

Here was a breakdown of their responses:

  • Highly accurate (almost no variance): 0%
  • Accurate (some variance, but not significant): 32%
  • Somewhat accurate (some significant variances): 53%
  • Very inaccurate (major variances): 8%
  • Variances aren’t analyzed: 8%

Two mistakes that reduce cash flow forecasting accuracy are:

1. Lack of Updating the Yearly Budget Regularly

2. Lack of Communication To and From the Accounting Department 

Start with reviewing your budget and communicating immediate changes to your accounting department moving forward. 

5 Ways to Increase Cash Flow Forecasting Accuracy

forecasting accuracy modelEvery business has different goals, variables, sales, etc. Because of this, each company’s cash flow needs will be very different.

Forecasting happens more than once a year and should allow you to pivot when needed. So you need to ask yourself, “Is my cash flow forecast accurate?” In asking that question, you will need to delve into the following areas to determine how accurate your cash flow forecast is.

Here are five questions to address to determine your cash flow forecasting accuracy: 

1. Are your department managers communicating budget changes to your CFO? 

Department managers and directors have needs throughout the year. Each department establishes a budget at the beginning of the year. They operate within this budget, but departmental and company-wide needs may change.

Changes to personnel, infrastructure, software needs, and more can change the budget. While sometimes small, these changes impact the forecast’s accuracy and should be communicated monthly to the CFO.

Communication is essential to the accuracy of the cash flow forecast. Your sales team places a vital role in this communication by providing the accounting department with potential closes, sales updates, client retention, and more.

2. Are your sales numbers based on 90-95% close probability? 

sales number forecastingYour sales team should only provide sales forecast numbers to place in the forecasting pipeline with a 90-95% close probability. Future sales numbers should be based on the year’s sales goals and updated based on conservative outcomes.

For example, if the CEO is aware of a situation which will negatively impact sales, then this change in sales should be input into the forecast.

3. Is your personnel sheet updated?

Payroll accounts for a large portion of all business expenses. If a department grows faster than expected and needs to hire a new employee, this projection should be updated in the cash flow forecast to show the impact on the future.

Future cash flow is also a good indicator of whether the company can support and pay the new hire.

Also, check your bonus and commissions within your personnel sheet as well. If you regularly give your employees a bonus during the holidays, you will want to have this in the forecast.

4. Are your cash inflows and outflows correctly identified?

cash flow cycleCash inflows are based on WHEN the payment for sales and services are collected.

For example, if a company invoices after a project is complete, the company needs to reflect the payment time in its cash flow forecast. This may be different than how the sale is recorded in the profit and loss statement.

Mistakes in outflow forecasting happen when companies don’t consider both fixed and variable expenses correctly. Variable costs change with your production and sales volume.

5. Does your forecast reflect what you would expect at that time of year for revenue, sales, expenses, and payroll?

Take a look at the following areas of your forecast:

  • Revenue
  • Sales
  • Expenses (variable and fixed)
  • Payroll

Are these areas reflecting what you would expect at that time? If the answer is no, then you have a problem. Ensure you take into account all these areas during your accounting team meetings. If something looks off, then address it and get to the bottom of why that number seems incorrect.

A miscalculation could be causing the inaccuracy, or it could be accurately forecasting a terrible outcome. If the result is awful, you can decide to pivot before it happens; this is the fantastic side of forecasting.

Your cash flow forecast accuracy will allow you to make decisions and observe the cash flow’s resulting impact. 

While cash flow forecasting may be a challenging and lengthy task, the process will tell you how much you can expect to generate to fund future business expansions. You can also use the forecast to generate “what-if” scenarios to questions you may be pondering as a business owner.

increasing cash flow accuracyYou can run those scenarios without impacting the cash flow to see how your decisions would impact cash flow in the future. Your accounting team is a profit center. Without their expertise, guidance and understanding (especially in the area of cash flow analysis and forecasting), you would not be able to easily sleep well at night knowing your company is ready for the future.

Your CFO knows to create and maintain a cash flow forecast throughout the year. If you do not have a CFO and are interested in a part-time CFO, inquire about our services. Your part-time CFO is affordable and can create and maintain an accurate cash flow forecast for your company.

Learn how RTA Group can meet your accounting needs with our expertise.