How to do better cash flow forecasting

Review your cash flow forecast regularly

Some companies will only look at a cash flow forecast when they are doing their annual business plan, or looking for funding, or if they’ve hit a rocky patch.

But if you only ever look at your cash situation when you think you need cash, you’re probably not running your business as effectively as you could be. That’s why we recommend you allocate specific time to regularly review your forecast.

Habit is important here because cash is the lifeblood of your business and having your finger on the pulse will mean you can respond proactively to changing situations, giving you the edge on competitors.

better cash flow forecasting

Set realistic expected dates for bills and invoices

How your short term cash flow plays out is highly dependent on when your debtors choose to pay you and when you choose to pay your creditors. A basic cash flow forecast will assume that all debts will be settled on the day that they are due.

But unless you’re making a regular payment through direct debit or standing order, the reality is this doesn’t happen. Because most businesses have an accounts payable process that group their bills into regular payment runs. For a small business, two payment runs a month is common. According to this iPolling survey, even multi-billion-dollar companies often only do payment runs on a weekly basis.

So an accurate cash flow forecast will involve grouping all your debts according to when you do your payment runs and changing the expected dates of those bills to match the the dates of your payment runs.

Predicting payment dates for your cash receivables is more involved. Some businesses will have an intuitive grasp on their customers’ behaviours when it comes to paying. Sometimes it is necessary to get input from client managers about when certain customers are planning to settle outstanding invoices. For larger organisations someone in the finance department might be specifically tasked with collections. Find whoever has the information you need and get them to give you regular updates that you can feed into a forecast.

The more you can rely on your forecasts, the more confident you can be in your decision-making.

Ask other people to help you prepare forecasts

While some of your cash flow forecast is represented by unpaid bills and invoices, there are many other upcoming transactions that are not yet represented in that way. Sales will be predicted but not yet booked. Marketing will be planning projects that are definitely going ahead, but no bills have yet been received. Senior executives will be planning future investments and drawings.

It’s impossible for one person to accurately predict the value and timing of all these medium-term transactions. But other individuals and departments in an organisation will know exactly what is coming up in their domain:

  • Ask sales teams what the next new months of sales are looking like (and the terms associated with them)
  • Ask the marketing department to predict their spend (and likely credit terms) over the coming months
  • Get clarity from key decision makers about when investments are going to occur and dividends are going to be disbursed
  • Talk to your accountant to get the latest update on your tax liabilities

Again, be disciplined about asking for this information regularly so that departments get used to reporting on it. Getting forecasts flowing regularly through a business will keep everyone on the front foot.

Look at your budget vs actuals

Finally, doing a regular review of what actually happened over a given period compared to what you predicted would happen is a very valuable exercise. The variance between forecasts and actuals should raise some useful questions. By asking those questions you are able to either change your systems and processes or you can adapt your future forecasts.

The more you review your forecasts for accuracy, the more accurate your future forecasts will become over time. And the more you can rely on your forecasts, the more confident you can be in your decision-making.

Ewan McCowen

I'm a marketing professional and Babson alum who loves all things business. When not in the office you might find me somewhere in the Scottish Highlands, fishing or wild camping.