How To Be Efficient in Cash Flow Forecasting
Updated: Feb 21, 2022
An efficient cash flow forecasting is a must in achieving a sturdy business foundation. With proper forecasting cash flow, we can estimate our future sales and expenses that govern the profitability of our business. Understandably, cash flow is difficult to predict. Therefore, we shouldn’t underestimate it and its effects on our mission-driven businesses.
In this solo episode of the Cash Flow Forecasting and Management Series, we discuss the top five common mistakes when forecasting cash flow. As we proceed, we can understand how effective forecasting yields financial gain for your business.
Do you want to learn the ideal way to forecast cash flow? Stay tuned to this episode!
Here are three reasons why you should listen to the full episode:
Learn the common mistakes in cash flow forecasting.
Discover the secrets of effective cash flow.
Understand ways to execute an efficient forecasting strategy.
Visit Christina Sjahli's website for more insights on cash flow and profit on the Her CEO Journey™ podcast series!
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Episode Highlights On Cash Flow Forecasting
[3:22] Forecasting Expenditures Based on Past Results
Forecasting the future based on your records doesn’t provide the ideal future visibility. Learning merely from past results would potentially ignore the additional expenditures that support your business growth. Besides, entrepreneurs might also overlook various unexpected events such as potential payments delay when taking new customers or projects.
“While you can learn from past results, forecasting the future only based on the past won't give you the future visibility you are looking for.”
[4:48] Overestimating Sales Line
Overestimating your revenue while underestimating your expenditures often leads to a cash shortfall. Given that the sales formula is quantity times price, founders need to review quantity and pricing to avoid overestimation.
“Remember, sales is a really simple math — quantity times price.”
The first mistake many entrepreneurs commit that leads to overestimation is not evaluating their historical conversion rate from lead to prospect to customers. In terms of pricing, founders assume value-based pricing is the best without knowing the actual cost of producing a product or serving a client.
[5:52] Clueless of the Cash Flow Conversion Cycles
Cash flow conversion cycle days is a metric that calculates the period for an entrepreneur to receive payment from their customers or clients. It is also used as a metric to pay their suppliers and to sell their inventory. A substantial cash flow gap can occur when there is a significant difference between the timing of cash inflows and outflows.
“...founders need to account for the unknown and test for what-if scenarios to ensure they can cover the future overhead to support the business growth.”
[7:06] Categorize Forecasting as a Finance Function
Instead of treating forecasting as a core business capability, business founders perceive it as a responsibility of the finance function — tied to a timetable and with little relevance to the business cycles.
“...the most practical forecasting happens when you are taking data from all business processes like marketing, sales, human resources, information technology, supply chain, and operation.”
Effective forecasting requires data acquisition from the various business processes to create better business decisions. In addition, every leader within the operation should collaborate in the forecasting procedure.
[8:09] Lazy Forecasting
The biggest mistake that many entrepreneurs engage in is not executing their perfectly planned forecast. With the unpredictable nature of business, forecasting should be a continuous activity.
“One of the ways to avoid lazy forecasting is actually having an accountability partner.”
Hence, it is essential to make frequent adjustments that reflect your business finances at any point in time. The strategy helps prevent cash flow crises, ensure profitability, and identify the potential for future growth. One way to avoid lazy forecasting is hiring an accountability partner.
Powerful Quotes On Cash Flow Forecasting
“Cash flow can be tough to predict. But it doesn't mean you can ignore it because cash flow ties in so closely to working capital.”
“Working capital has an impact on your business ability to purchase materials for business development and additional hirings.”
“If you don't, then your cash flow forecasts can mislead you to the wrong decision.”
“This is the biggest mistake many founders did — create the perfect forecast and forget it.”
“...forecasting should be a continuous activity. You cannot just set it and forget it.”
Enjoyed this episode on Cash Flow Forecasting?
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