What is a cash flow forecast?
Simply put, cash forecasts can help paint a picture of an organization’s financial future by predicting future cash flows. While forecasts vary in size and scope they all aim to increase the efficiency of a business’s cash management.
“Staying on top of your cash flow will help you see if you’re going to run out of money – and when – so you can prepare ahead of time.” -PWC
The case for having a strong cash flow forecast has only been amplified by the COVID-19 pandemic. Businesses across every sector are feeling the effects of shut-downs, social distancing requirements and decreased travel. Many organizations are now facing tight margins, dwindling cash reserves, and are relying on forecasts to avoid cash shortages.
There are a number of variables that can go into a forecast, one of which is duration. According to CBIZ a 13 week forecast is ideal for those feeling the impacts of COVID-19. “If you are starting to feel the pinch from new business slowing down, contracts being delayed or workers being kept from doing their core job functions, a well-crafted 13-week cash-flow model (TWCF) will serve as a reality check for all stakeholders and assist in highlighting a logical path forward.”
What makes the 13 week forecast unique and what will it do for me?
The 13 week forecast allows businesses to anticipate cash flow for a full fiscal quarter. The achilles heel of the forecasting process, is forecast accuracy. Generally, the further a forecast extends, the less accurate it will be. The 13 week forecast allows businesses to plan ahead while finding a balance between the accuracy of the forecast and its strategic value.
When a business is doing well, the 13 week forecast serves as a great tool for investors who will want to understand the cash conversion cycle of the business.
According to Deloitte, “Having a robust 13 week cash-flow forecast will assist in your communication with the banks and other key stakeholders as it better monitors debt covenants, debt service coverage ratio, cash conversion cycle, and debt capacity.”
While no business wants to see a cash shortage, it can be helpful to know when a shortage will arise as it gives the business time to be proactive and take measures to avoid missed payments like identifying and eliminating discretionary spending, increasing controls over cash and even exploring financing options.
How do I create a 13 week cash forecast?
For those just getting started, the easiest way to create a 13 week cash flow forecast is with a cash flow forecasting Excel template.
Once you’ve found and downloaded a template, you will want to compile your data. Depending on your preferred forecasting method this could be anything from a list of company transactions to financial statements.
Once you begin to generate forecasts you will want to continually check them against the actual data and adjust the models as necessary. To increase accuracy, consider adding more transactions or historical data trends into the forecast.
While Excel can be a great tool for generating a forecast, it is an extremely manual process and is often vulnerable to user error. If you are looking for a less manual and more accurate forecasting solution, turn to Trovata.
Trovata’s automated cash management platform automatically collects cash data from across all of your banks and accounts, then leverages that data to create custom cash forecasts. Trovata also applies machine learning algorithms to analyze and integrate historic data trends into the forecast, improving accuracy.