Weekly саsh flow foreсаsts seem relаtively simрle sinсe they meаsure the саsh inflows аnԁ outflows over а short time рerioԁ. However, businesses must рut signifiсаnt effort into сreаting effeсtive аnԁ ассurаte weekly саsh flow foreсаsts.
This аrtiсle will tаke you through five essentiаl elements of сreаting а weekly саsh flow foreсаst thаt gives you аn ассurаte рiсture of your business’s finаnсiаl рosition, setting you uр for short-term аnԁ long-term suссess.
Accurate Starting Cash Balance
An accurate starting cash balance is the starting point for any cash flow analysis and is important because it reflects the financial health of a business. An inaccurate starting cash balance gives your cash flow forecast a weak foundation, leading to inaccurate weekly cash flow projections and, therefore, misguided decisions.
What Constitutes Your Starting Cash Balance?
Starting cash balances are based on an actual bank statement and should match the closing balance of the previous period. A starting cash balance can be positive or negative depending on cash inflows and outflows in the previous period.
Detailed Cash Inflows
Preparing a detailed list of cash inflows is crucial for an accurate weekly cash flow forecast. Sales are typically the biggest source of cash inflows, but smaller sources of income can add up and significantly affect cash flow. Include cash inflows such as:
- Customer prepayments
- Government subsidies
- Royalties
Getting cash inflows right is crucial. For example, if a business underestimates cash inflows, it may incorrectly take a conservative approach when in fact it could be spending more to grow the business.
Comprehensive Cash Outflows
Like cash inflows, cash outflows must be detailed and accurate. Make sure to include the following cash outflows:
- operational expenses
- debt payments
- costs of entering new markets
- maintenance costs
- capital expenditure
Underestimating cash outflows can lead to an overly optimistic cash flow forecast, leading to overspending.
Forecasting Techniques for Accuracy
The effectiveness of cash flow forecasting depends on the business forecasting methods. A business should keep the following in mind if they want to create accurate weekly forecasts.
Accurate historical data
Cash flow forecasts should include accurate historical data, otherwise the results can be unreliable. Businesses can use programs like Cash Flow Frog to import detailed data from existing spreadsheets and use the data to make accurate cash flow projections.
Regularly update forecasts
Always update your forecast models with the most recent information. Software like Cash Flow Frog can help with this, as it integrates with programs like QuickBooks and Excel to update forecasting data in real time.
Standardization across departments
One of the challenges of cash flow forecasting is creating standardized data collection methods and making the results of the forecast available to all departments. Make sure all departments understand data collection methods so the data used for the forecast is reliable and accurate.
Create clear and concise financial reports, so you can share insights from cash flow forecasts with all departments and receive valuable input from all employees.
Planned vs actual forecasts
Another key component of building an accurate forecast is comparing previous weekly forecasts with actual results. This can help you understand where you went wrong in your forecasts and make adjustments to ensure more accurate forecasts in the future.
A Contingency Plan for Unexpected Events
Cash flow forecasts are only predictions, which means businesses should never rely solely upon forecasts and should always have a backup plan in place.
An easy way to plan for unexpected events is to conduct a scenario analysis. With this technique, businesses can test how certain decisions will affect cash flow. For example, decision-makers can perform scenario analysis to see how losing a key customer would affect cash flow.
Cash flow is always affected by external factors and trends in the market. Businesses must assess market conditions and try to predict any market changes that could affect their operations and profitability.
By understanding potential outcomes, businesses can make contingency plans to mitigate the negative effects of disruptions.
In conclusion
Creating an effective weekly cash flow forecast is relatively easy if you follow these five key points. Starting cash balance, cash inflows, and cash outflows are essential components of a cash flow forecast. Therefore, starting cash balance must be accurate, and inflows and outflows should be as detailed as possible.
Use business forecasting methods like updating forecasting data in real-time and comparing planned versus actual cash flow. Finally, a cash flow forecast isn’t a crystal ball, so you should always consider external factors, test multiple scenarios and make contingency plans to minimize the impact of unexpected disruptions.