What You Need to Know About Cash Forecasting

Florida CFO Group partners Joe Price, Dick Trueblood, and Tom Walker discuss the importance of cash forecasting for small and large organizations.

Tom: Cash flow analysis is very important for a business to be successful. 82% of businesses fail due to poor cash flow management skills. It doesn't matter how great a business model, how profitable, or how many investors a business has lined up. You will not survive if you don't manage cash flow.

Joe: Knowing what your cash balance in the company bank account is NOT cash flow management.

Dick: Right. And just because your business is profitable, it doesn't mean that it has good cash flow.

Tom: It seems counterintuitive, but cash flow and profitability are different. Profitability is a must if the business is going to stay in business, but cash flow for a business involves the "timing" aspect of when cash is actually received and disbursed, and what capital investments in inventory, fixed assets, etc., or financing, such as bank loan repayment, interest expenses, etc., are going to be required.

Dick: Cash forecasting is just as important for both small companies as it is for large organizations. It's critical at all stages of a company's growth:

  • Startup
  • Growth
  • Mature

Joe: Cash forecasting will help predict the business cash flow "cycle." It will guide the management team in determining cash shortfalls and surpluses over a period of time and help determine -- IN ADVANCE -- what financing or investment options they might need to pursue.

Dick: Understanding the business cash flow in advance allows for proper planning and execution with financial institutions and helps make sure there aren't surprises when it's time to make a loan payment or purchase new inventory.

Tom: I recommend using both a 13-week rolling cash forecast along with a 12-month cash forecast. This allows you to see the big picture for the year ahead, while seeing the timing differences of cash flow on a week-to-week basis. After both cash forecasting tools have been set up, the cash forecasting will have to be updated going forward on a regular weekly and monthly basis.

Joe: Once cash forecasting has been set up and is being updated, the company will be able to focus on good cash management. The first step to improved cash management is to maximize cash flow. Sales and receivables are a good starting point - Including customer approval procedures, negotiation of good customer terms, invoice promptly, good procedures for follow up on the timely collections, even offering discounts for early payments. Payables are another potential source of improved cash management - Including negotiating good debtor terms with payment terms on or after the scheduled collections of cash flow, taking advantage of discount terms, etc.

Dick: a company should also consider cash management tools such as lock box accounts, that enable customer receivables to be mailed directly the bank for processing. This helps the company to collect funds quickly. And sweep accounts where the organization's checking accounts are zeroed out at the end of the day and swept into an overnight investment account that typically yields 10 to 20 points lower than controlled investments.

Tom: The first step is to contact an experienced financial professional who can help you set up the necessary cash forecasting and management tools your company needs. They can work directly with company management on determining the proper cash forecasting system, setting it up and establishing the process for its ongoing updating, along with the cash management tools needed, banking and financing requirements, etc.

Once this system is executed, company management will better be able to chart the company's future.

In our next blog Florida CFO Group partners -- Dale West, Jay White, and Betsy Bennett discuss Looking at a Potential Purchase. 

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