![]() In this step, don’t worry about the cash flow timing associated with the P&L forecast - that comes next. The P&L is only one portion of the cash flow forecasting equation, but you’ll want to make it as accurate as possible, so be realistic about your sales projections, make sure that your fixed expenses are accurately planned out, and properly tie your variable expenses to the level of business activity you’re expecting in each period. Map out your business plan and operating activities for at least the next 6-12 months. So, what does it take to build a reliable cash flow forecast? Driver-based forecasting can give you a rough idea of the levers to pull in your business and how they impact your finances in theory, but if you need an accurate weekly cash flow projection, the margin for error using drivers and other indirect methods is just too large - you’ll never even get close to the real numbers. Mistake #3: Driver-based forecastingĭriver-based forecasting and other indirect methods can seem like “quick and dirty” ways to build a working projection, but when you only look at summary level data, or drive your projections based on generalized ratios and metrics, you’ll end up with a forecast that’s only loosely based on reality, and useless for any real-time tactical planning. Many forecasting solutions hyper-focus on receivables and payables, but if you ignore all the other factors impacting your bank account, you’ll end up with an inaccurate (i.e. What about all of your future business activities that aren’t yet booked as receivables and payables? Not to mention the other balance sheet movements from credit cards, debt, dividends, etc. Existing invoices and bills play an important role in cash flow, but your A/R and A/P only tell a fraction of the story. Mistake #2: Hyper-focus on receivables and payablesĪnother common mistake is focusing too much on existing Accounts Receivable and Payable in the cash flow forecast. Forecasting your P&L is only the starting point of a good cash flow projection. ![]() Even a “cash basis” P&L forecast will fall short on reflecting all of the cash moving in and out of your business. P&L forecasts are still important for business planning, but they only tell part of the story. Unless you immediately collect all revenues as cash, pay expenses exactly when they are recognized, never use credit cards or debt, and don’t invest in equipment or other fixed assets, Net Income alone will not reflect your cash flow realities. Otherwise, you’ll end up wasting your time and putting your trust in incorrect numbers, which will only cause more problems in the long run.īefore we break down what’s needed to build a truly accurate cash flow forecast, here are 3 big pitfalls you’ll want to avoid. Make sure you ask the right questions and use a forecasting model that’ll give you accurate insights and cut down on your overall workload. However, before you jump at the cheapest solution, or plug your numbers into a cookie-cutter template, it’s important to consider whether you’re actually choosing the right tool for the job. ![]() Given the current economic climate, there’s been a heightened focus on cash flow management and forecasting.
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