Given the importance of cash flow in times like this, companies should immediately develop a treasury plan for cash management as part of their overall business risk and continuity plans. In doing so, it is essential to look at the complete ecosystem. This type of cash management control will not only have implications for the business, but also for your customers.
In the current situation it is recommended to discard the normal business playbook, “Profit and Loss Statement”, and shift to the 13 Weeks Cash Flow Forecast as the tool that drives business decisions. This is going to cause a paradigm shift with business owners because they have rarely work with or used Cash Flow Forecast.
Business Owners and Management Teams that don’t have extensive experience working with Cash Flow Forecasting should strongly consider working with a financial service provider that can facilitate the creation and delivery a Cash Flow Forecasting tools. Financial professionals that work with this tool are able provide targeted information to Business Owners so they can quickly execute smart liquidity strategies.
Cash Flow Forecasting
A cash flow forecast is a projection of a company future financial position based on anticipated payments and receivables. The main goal of a cash flow forecasting is to assist with managing liquidity within a company and to ensuring that the business has the necessary cash to meet its obligations and avoid funding issues. In a crisis situation reading the tea leaves and forecasting the cash position is a critical to the short-term survival of the organization. The 13 Week Cash Flow Forecast is best tool to model these types of cash flow scenarios.
The universal truth of forecasting is that accuracy degrades as forecast range increases, and the core value of the 13-week CFF comes from its balance between range and accuracy. In a “Cash Crunch” environment, this means that a 13-week forecast can facilitate both short and medium-term cash and liquidity management and, because shorter time range provides enough accuracy to strengthen critical decision making.
The ability of a company to extract data from the ERP / MRP or general financial system is vital to the person or finance team that is working with this data. The degree of accuracy in the CFF is completely based upon the system database information containing the correct dates, costs, vendor terms, and other details. The emphasis on having accurate and complete data from a main operating system can’t be stressed enough when having to make important cash decisions.
The Key Components of the Cash Flow Forecasting
- Reconciled Bank Balance
- Sales Orders / Future Invoices
- Accounts Receivable / Outstanding Cash Collections
- Purchase Order System / PO Controls
- Accounts Payable / Purchase Invoices
- Wage, Salaries and Benefits Costs
- Inter-Company Transaction (only if applicable)
Reconciled Bank Balance:
Reconciling the cash bank balance to the general ledger and reporting that to Management should be the first task of the day for finance team when you are working under emergency situation. The updated cash balance must to be compared to the payment priorities that are in the current week cash payments requirements.
Sales Orders / Future Invoices:
Companies that input, track, and manage the release of sales orders from their ERP / MRP are likely to be able to estimate when their customers will be invoiced in the future. The ability to predict when invoices will be issued, and the estimated payment date are important pieces of information that businesses must tracked in the CFF. Companies need to ensure that invoices are processed timely and accurately, because this avoids any errors in your billing process that can lead to costly delays in receiving payment.
Accounts Receivable / Outstanding Cash Collections:
Cash is KING and getting cash into the bank account is “Priority One”. The business needs to focus on customer-specific payment performance and identify companies that may be changing their payment practices. Using the system data that tracks the timeliness of customer payments and having a good working relationship with your customers are vital elements to determining the accuracy of invoice collections. Aggressive techniques such as factoring your receivables, although relatively expensive, may be your best option to improve cash flow quickly.
Purchase Order System / PO Controls:
Using Purchase Orders is one of the best ways to control expenses and monitor the future impact of cash payments. To often companies don’t implement the Purchase Order process as part of the internal and financial control procedure but having the PO controls in place would make estimating future cash payment much more reliable and accurate.
Accounts Payable / Purchase Invoices:
Consider negotiating for the most favorable credit terms with suppliers. This area of the CFF is often the trickiest to manage because of multiple priorities and suppliers’ relationships can be negatively damaged if there aren’t good lines of communication between the supplier and buyer.
Wages, Salaries and Benefits Costs
For many companies, staff payroll accounts for the largest outflows from the company’s accounts. It is also generally one of the easier items to forecast, owing to the fact that staff are generally paid regular salary amounts at regular intervals.
The bottom line is that CFF is a valuable measure of strength, profitability, and of the short-term future outlook for a company. The CFF can help determine whether a company has enough liquidity or cash to pay its expenses. A company can use a cash flow forecast to predict future cash flow, which helps when there is a crisis situation / “Cash Crunch”, or also be used to model new project development impact so that management and investors have full transparency to the risks and future obligations of an organization.
Are you interested in learning more about the Cash Flow Statement or Cash Flow Forecasting tools, or if you need help on how to better utilize these tools? Rocket Office is specialized in the finance and accounting challenges of startups and growth companies, including managing Cash Flow and Cash Flow Forecasting. If you have any questions, please feel free use the contact information shown below . We are here to help you and we are looking forward to helping with any Cash Crunch issues that your business is facing now.