Cash flow forecasting: at a glance
- What do I need to know? Cash flow forecasting helps CFOs understand whether the business has enough liquidity to thrive in the near future.
- What does it mean for me? Agile reforecasting lets you adjust cash flow projections in real time to stay ahead of unexpected changes. This could be the difference between growing your business, standing still, or losing money.
- Why does it matter? Understanding your business’s cash flow empowers you to take control over your money and focus on growth, even in challenging economic circumstances.
Accurately forecasting cash flow is essential for successful CFOs, with one in four SMEs (Small and Medium Enterprises) citing cash flow challenges as a barrier to growth.
But agility is becoming just as important as accuracy - especially during uncertain times. The ability to rapidly reforecast can help you anticipate opportunities or challenges before they arise, protecting and growing your business.
In this guide, you’ll learn how to prioritise agility and efficiency in cash flow forecasting, even during difficult economic circumstances.
Cash flow forecasting as an agile CFO
Forecasting cash flow means calculating how much money will move in and out of your business over a specific period, like a year. This is broken down into three cash flow categories:
- Operating cash flow: The costs of making items against selling your goods.
- Investing cash flow: How much money is tied up in, or accessible from, investments. This includes research and development of products, buildings owned by the business, and financial investments.
- Financing cash flow: Money used to fund the company, including loans and angel investments. This can also include outgoings to cover repayments.
Traditionally, CFOs and small business owners might have forecasted cash flow for the coming year. But with limited visibility, the risk to the business is considerable.
Research from Agicap suggests 37% of CFOs are working with unreliable cash flow forecasts, costing them an average of £600,000 a year.
So, simply having a forecast in place is not enough anymore. Cash flow forecasting has become a live question, and one influenced daily by supply chain issues, changes in demand, and wider financial considerations.
Challenges for CFOs in forecasting cash flow
The challenge for CFOs comes in the form of the fast-paced and often unpredictable modern market. Forecasts can quickly become outdated and put SMEs at risk of cash shortfalls that can impact business operations.
These sudden shifts can directly affect your working capital (the money available after you’ve covered everything you owe in the short term). When cash is locked up in any part of the chain for too long, it can reduce liquidity.
This can leave CFOs with less flexibility to handle immediate debts or invest in growth. This can even put pressure on CFOs to react when they should be in control.
Instead of making decisions based on data and taking a proactive approach to managing supply chain costs, you might be tempted to act on impulse.
Problems with cash flow forecasting: an example
For example, if you’re a CFO of a small retail business you might rely on a healthy forecast method that has proved reliable for years. Suddenly, an overseas manufacturer experiences shipping delays and demands earlier payment to secure goods.
Without a dynamic, real-time forecast, you’re unable to prepare for this disruption. You might even be tempted to freeze recruitment and marketing spend to keep cash reserves stable.
This can also mean CFOs miss opportunities to maximise the value of their cash. Failing to anticipate periods of surplus cash means you might end up leaving your reserves in low-interest accounts, when they could be earning interest and growing in value.
Reforecasting to combat unpredictability
When unexpected challenges hit, it’s time to reforecast. Thankfully, this no longer means hours spent manually entering adjusted numbers.
Live, dynamic forecasts automatically update with new financial data. This allows you to adapt based on real-world information to help prevent supply chain challenges from disrupting your business operations.
This live data feed also makes it possible to run scenarios based on historic or emerging trends. So, lengthening payment terms or sales cycles is less likely to put CFOs on the back foot. Instead, you can switch strategies to serve the needs of the business better.
And it’s not just about responding faster. Reporting with greater confidence can help gain stronger stakeholder buy-in for new initiatives, such as fixing cash in high-interest accounts during periods of increased profitability.
But how can CFOs get the most out of a live, scenario-tested cash flow forecast?
How to make a cash flow forecast more efficient
The most reliable way to stay in control of your cash - and your financial strategy - is to make your forecast more agile and efficient. There are different ways to do this.
Automate cash flow forecasting with software and tools
The days of relying solely on static spreadsheets are over. Aligning your forecasting efforts with specialist tools and software can minimise inaccuracies and free up more time to spend on strategic decisions rather than manually inputting data.
Cash flow forecasting software
Forecasting software can bring the insights hiding in spreadsheets to life, with predictive features designed to help you stress test.
Accounting tools
Integrating accounting software with your forecasting efforts gives you access to real-time invoicing, expensing, and payment data. This can reduce the delay between cash moving in and out of your business, and when this is reflected in your accounts.
Forecasting with live numbers means you can spot patterns early and adjust your strategy to account for payment delays and reduced access.
Financial Planning & Analysis (FP&A)
As a CFO, combining FP&A with cash flow forecasting efforts can unlock deeper insights into operational trends, seasonal sales, and performance.
This adds colour to the numbers in your forecast - telling you more about how these external factors impact your liquidity.
Does automating cash flow forecasts affect accuracy?
When set up correctly, automating cash flow can actually improve accuracy. This is because it removes the potential for human error.
But automating cash flow forecasting doesn’t remove the need for human involvement entirely. It simply minimises the manual effort out of updating every line and figure.
You’ll still need to make sure your systems are reliable and that you’re able to interpret the data to make informed, strategic decisions.
Direction over detail
The point of forecasting is to prepare for challenges or maximise periods of positive cash inflow.
A useful cash flow forecast is one that reliably and accurately records information about your business’s biggest drivers, like sales and funding coming in and operating costs going out.
If these are updated in real time, CFOs can be confident that they’ll be ready for surprising shortfalls or surpluses.
Forecasting cash flow to take control of your business’s finances
Forecasting cash flow can be one of the most powerful ways to stay in control of your business’s finances.
Reliable, agile, and efficient forecasting empowers CFOs to make informed decisions with their cash to protect it during unpredictable times and grow it when the time is right.
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