Top 3 things to make STRONG Cash Flow forecasting system for any business
Cash Flow Forecasting is a great tool to help any business to forecast its difficult or over comfortable cash flow situation. What crucial here is, how regularly you prepare it & how religiously you follow it.
I have come across some entrepreneurs who may have cash flow forecasting system but they either did not bothered to discuss it with their finance or the forecasting system lagged certain critical information and they managed to realise it only when the business went into a dire straits.
To ensure that you make & use a strong cash flow forecasting tool in your business, these crucial points will make it much easier to manage your daily cash flows.
- Early Warning System: To make your cash flow forecasting strong, embed a warning system in it by building certain signals to be highlighted to all stake holders well in advance, so that a timely discussion & prompt action can be planned.
- Keep tightening all underlying assumptions: Review your cash flow forecasting regularly to keep updating all inbuilt assumptions. Ensure your assumptions are more realistic & easily predictable. Do not hesitate to change them if they are distorting the forecast.
- Build it gradually: Initially try to forecast your first few weeks of cash flows & once it starts matching the actual performance, you may then gradually increase the forecast tenure and just ensure to keep on comparing it with any business changes & any change in the strategies that impact business cash flows.
While you prepare your templates & system just ensure you keep it simple enough for all stake holders to easily understand it, otherwise over complexities will just kill the system even before it gets implemented. Happy Forecasting!!
Amit Bhuttan is a Lead CFO of CFO Ladder LLP, a business consulting firm that helps early-stage, small and middle-market businesses grow through design and execution of sound financial strategies. You may reach out to him at firstname.lastname@example.org