Projecting cash flow is hard. But the more accurate you can make a cash flow projection, the more powerful they become.
Here’s a list of 9 things we see business owners and finance directors doing that give them mastery over their cash flow predictions.
1. Clearly articulate your plans
As Eisenhower once said: “plans are worthless but planning is everything”. When you sit down and deliberately think through the decisions you want to take in the future, you put yourself in a great place to make more accurate predictions about your cash flow forecast. When there are no plans and decisions are taken on an ad hoc basis, there’s very little chance of a cash flow projection matching reality.
2. Do regular sales forecasting
Businesses that have a clear system for forecasting their sales are much more accurate at forecasting their cash revenues than those that work on a hunch. Guesswork risks over-optimism, whereas having a sales pipeline with clear stages and a solid understanding of your sales cycle provides much more certainty.
3. Look at your budget vs actuals
If you regularly look at the difference between your projections and what actually happened, you can challenge yourself to understand the reasons behind the differences. By exploring the process you go through to forecast and questioning your assumptions you will find your predictions get more accurate over time.
4. Remember ALL your expenses
It’s easy to underestimate the cash flowing out of your business or even omit items altogether. Always make sure you’ve included all your expenses. Check and double check. Big, one-off payments can be a killer and they aren’t always easy to remember.
5. Keep your cash flow projections up-to-date
Keeping your cash flow forecast up to date can be a painful, time-consuming process. It’s easy to let slide but if you do that, your numbers are immediately wrong. Carving out a specific time in your weekly schedule for this sort of admin is a great way to stay disciplined. Doing a little, often is the key.
6. Involve your different departments
It’s highly unlikely that one person will have all the information necessary to produce really accurate numbers. The businesses we see producing the most accurate cash flow projections involve different people and departments in the process of creating them. Regularly talk to your sales team, talk to your marketing team, talk to anyone who influences either the cash coming into the business or going out of the business.
7. Have a robust credit control process
A credit control process brings a lot more predictability to your cash revenues. When you consistently chase your customers to pay their invoices within the payment terms you offer, they become far less likely to pay late. When you have no system for collecting payments, customer will pay you when they want to, making it infinitely more difficult to create accurate cash flow projections.
8. Use the best methodology for creating your forecasts
Did you know that there are different methodologies for creating cash flow forecasts?
The indirect method is comparatively easy to create (using P&L, balance sheet and income statement) but if far less accurate than a forecast created using the direct method. Conversely, the direct method is a poor way of forecasting over the long term. (You can read more about the methods here).
Identify why you are doing cash flow forecasting and select the best method to give you the results you need.
9. Invest time
This stuff is difficult! But the more time you carve out for forecasting the better you will become at understanding the rhythms of your business and at recognising the different levers you can pull to control the future.
What is Float?
Float is a cash flow forecasting solution for business owners, finance departments and business advisors. We integrate seamlessly with Xero, Quickbooks Online and FreeAgent to give you an easy to use but powerful tool that provides an accurate view of your future bank balance.
Best of all, because Float pulls real time data from your accounting software, we automatically update your actuals giving you a live, rolling forecast that never goes out of date.