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How Can Cash Flow Forecasting and Analysis help guide your business?

Cash flow is an important barometer for the financial health of an organization. Sir Richard Branson, the founder of the Virgin Group, once said, “Never take your eyes off the cash flow because it’s the lifeblood of business.” No cash flow, no business.

Cash flow is defined as the amount of money entering and leaving a business over a given period of time. It is important because it enables an organization to meet existing financial obligations as well as plan for the future. Successful business leaders know healthy cash flow is essential for the survival, sustainability, and growth of an organization.

Michael Dell, founder, chairman, and CEO of Dell Technologies used a brilliant analogy to explain how important cash flow is and how if an organization can’t pay its bills, it will grind to a halt. He said, “We were always focused on our profit and loss statement. But cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer, when in fact, we were running out of gas.”

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Cash flow forecasting

A cash flow forecast plan shows how much money an organization expects to receive and pay out over a set period. It can help plan how much is expected in sales and how much will be spent on costs. It helps finance teams differentiate between profit and cash flow and understand when money will enter and leave the organization’s bank account.

Strategic decision-making and planning can be hindered by a lack of future financial visibility, which can slow operations down. To make informed and quick strategic decisions, organizations can use cash flow forecasting to show them what their financial situation will be in the future.

Categories of cash flow

  • Operating activities – cash generated by a company’s core activities and related to net income. This can be cash generated from the sale of goods or services (revenue) and cash paid for expenses. Interest paid and received from loans will also be included in operating activities.
  • Financing activities – cash activities related to noncurrent liabilities and owners’ equity. Noncurrent liabilities and owners’ equity items include any long-term debt, equity, or dividend payments.
  • Investing activities – cash activities related to noncurrent assets. Noncurrent assets include long-term or capital investments, property, plant and equipment, stock or securities of another company, and any loans made to other entities.

The benefits of cash flow forecasting and analysis

Anticipate and plan for cash shortages

In uncertain times, an organization’s ability to navigate through disruption and instability can be the catalyst for long-term financial health. A cash flow forecast serves as an early warning sign to spot cash gaps before they hit the organization, like a forensic lens on cash balances in multiple expected future circumstances. Forecasting provides an appropriate time to cover any dips in cash flow. Seeing this in advance means finance teams can act before it happens by cutting operating costs, waiting to update equipment, changing customer payment terms, or finding alternative finance options. Many organizationsoperate with little margin for error, so having an accurate cash forecast analysis can enable organizations to anticipate potential cash dips and avoid missed payments or even help predict a surplus.

Track spending

Outgoings from an organization and the impact of budgeting can be tracked properly with cash flow forecasting. It helps to monitor all regular expenses and outgoings, such as salaries, rent, and utility bills, to calculate a guaranteed total of outgoings.

Scenario planning and management

Cash flow forecasting and analysis allow an organization to create hypothetical business situations and evaluate possible impacts. Using a detailed cash flow forecast allows the organization to change independent variables and develop informed business strategies based on what works best for each situation. Creating these scenarios enables strategists to steer a course between the false certainty of a single forecast and the confusion that often occurs in troubled times.

Cash flow forecasting can protect a business by spotting warning signs well before disruptive events happen. Cash flow analysis gives a crystal ball view into the future of what a company could achieve with accurate data to support business decisions, and with agility and speed, unexpected disruptions can be navigated successfully.

Monitor late payments

If a cash flow forecast regularly falls short, late payers within a portfolio will be highlighted, making the finance team aware of which customers are negatively affecting the bottom line. The forecast allows visibility on how much should be coming in if everything is going to plan, so downfalls can be identified.

Allocate Cash Surplus

Forecasting and analysis help identify potential cash surpluses and allow finance and business leaders to allocate excess cash efficiently. Whether they decide to invest or create a competitive advantage, it is essential that forecasts are leveraged. Again, scenario planning can help in this situation to forecast the impact of specific investment decisions.

Manage foreign currency risk

When managing foreign currency risk, having a reliable forecasting process is crucial. Forecasts allow finance teams to anticipate cash needs, reduce the need for foreign currency transactions, and better understand their exposures so they can create a plan for mitigating the risk.

In summary…

The ability to quickly design and generate targeted forecasts allows organizations to project the impact of decisions and the potential value of investments before they are made. Scenario planning can be used to answer cash flow-related questions so the organization always knows whether it is able to pay creditors and employees, what its operational expenses are, and how it can optimize the use of its cash.

How Unit4 can help your organization

Unit4’s FP&A software for integrated financial planning (IPF) can speed up planning and forecasting with a flexible, integrated approach to cover all an organization’s financial planning needs, whether planning cash flow, managing operational budgets, or forecasting sales, costs, and revenue.

Our IFP solution covers all aspects of planning. It gives you a clear overview of your actual figures, as well as forecasting capabilities, analytics, and reporting customized to different target groups.

You can check out our suite of solutions or book a demo here.

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