6 Best Practices for Building an Accurate Cash Forecast

Written by Kalei White
November 29, 2022

A cash forecast helps set the trajectory for future business operations. The better the forecast, the more accurately a business can plot its way forward. It allows insights into potential cash-flush positions or areas where cash flow might run thin so you can better plan potential investments or loans. 

Here are six industry best practices that can improve how you forecast. 

1. Know Which Period Your Cash Forecast Is for

The forecast period plays a significant role in the eventual outcome of your cash allocations. Determine whether the forecast is short-term for daily cash flow planning or long-term for funding or investment rounds. 

Popular cash flow periods include: 

  • Weekly, 30-day, or 60-day: Short-term cash flows are usually for internal use to determine the possible cash forecast with as few variables as possible. 
  • 13-weekYou would use this cash forecast to determine the inflows and outflows over a rolling 13-week period, which means that as one period finishes, the next begins. In other words, the forecast is always up-to-date. 
  • Rolling 12 months: Possibly the most popular cash forecast is the rolling 12 months, which provides businesses with enough insight into the company’s financial future based on past performance. This cash forecast often allows businesses to make decisions about medium-term commitments like equipment finance. 
  • Beyond 24 months: Businesses typically have a five-year cash forecast as part of their business plan to track progress and measure growth. Investors and lenders might require this to see the potential profits before investing or funding. 

2. Streamline Your Forecasting Through Automation 

Manually gathering information for forecasts is possible. You would collect information from various sources like bank accounts and cash reports and then feed it into a manual document, like a spreadsheet. However, that process is often slow and prone to errors. 

A better option is automation. 

Trovata uses automation to download information from various sources. Machine learning then uses the patterns in your financials to create reports and cash forecasts. 

For Antonio Chavez, Treasury Information Analyst at The Biltmore Group, the process previously took hours. Now it just takes minutes. 

“Since all the data from the bank portal is flowing to Trovata, creating a report with the software, especially for us takes minutes instead of hours. As long as you have the proper tags in your transactions, then creating a forecast or creating a report won’t take time, or won’t take a long time.”

– Antonio Chavez, Treasury Information Analyst at the Biltmore Company

This type of automation also ensures that the information is error-free and less prone to data gaps. 

3. Forecast Potential Market Swings   

Cash is a vital part of keeping businesses going when times are tough, but it’s hard to prepare for these times when the forecasts are always based on cash-flush positions. Instead, include diverse market situations like economic downturns to better prepare for possible negative cash flows. 

4. Create Consistent Reporting 

It’s easier to create accurate forecasts when you know the forecasting schedule. Consistency ensures you’re always on top of your forecasting game, as you have continuous cash forecast schedules. 

It’s also important to note that the quality of the data will also determine the accuracy of the reports and forecasts. Even when using cash forecasting software, you still need to do some of the legwork to ensure the output is what you need.

 Garbage-in-garbage-out might seem like an archaic reference. However, when it comes to financial data, it still stands. The better you categorize and label the information, the more reliance you can place on your reports.

5. Focus on Working Capital 

Working capital provides the cash to meet your short-term financial objectives. Without working capital, it’s hard to meet obligations such as bill payments, salaries, stock purchases, and other cash outlays required in the daily running of the business. Cash forecasting should highlight areas that free up cash to meet these obligations. 

For instance, if you tie all the money into long-term projects like investments, the business can become cash-poor, leaving you to rely on working capital. While this is a short-term solution, it’s also expensive and can cause financial hiccups if there’s no long-term plan to increase working capital. Accurate cash forecasts will reveal if this is bound to happen. 

6. Allow Open Discussions 

A cash forecast is more than just a prediction about future finances. It’s also a working document that allows teams to navigate a company’s financial situation and make adjustments to create the best possible cash flow for the business. 

This means financial teams should provide input into the cash forecast findings and steer the finances in a direction that will meet short-term and long-term financial needs. 

How Trovata Can Help You Build a Robust Cash Forecast

It’s not easy to create the perfect cash forecast, especially if there’s more than one in and outflow of cash. Cash management software like Trovata can transcend these difficulties and help you create cash forecasts that are accurate and adaptable to the changing conditions, needs, and inputs of your business.

Trovata uses machine learning to generate and visualize your cash forecasts. It uses your data streams, tags, labels, keywords, filters, and other indicators to customize your forecasts according to your business needs. With automation software, your bank data automatically downloads into Trovata’s dashboard. While this kind of data collection and normalization usually takes hours, Trovata does this in minutes. 

Furthermore, centralizing all your banking data allows you to generate global cash forecasts across accounts and subsidiaries. 

To see Trovata in action, check out our step-by-step guide on building a 13-week forecast

how to build a 13 week cash forecast 6 steps bottom

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