How many times have you heard the saying; cash is king?

Probably too many times to count. Yet, it keeps coming back up again and again because it’s true. Cash really is king and it’s the lifeblood of a business, which is why you’ve got to keep track of it.

But we know that forecasting cash flow can be a challenging task, especially for small businesses and startups. There are a lot of variables to consider, and it can be tricky to predict the future with any degree of accuracy.

In this post, we dive into the most common cash flow forecasting challenges, along with tips to overcome them.

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What is cash flow forecasting?

Cash flow forecasting is the process of estimating the amount of cash that a business will receive and spend in the future. This can be done for a specific period of time, such as a month or a year, or on an ongoing basis.

Think of it like a GPS for business, helping you navigate through the ups and downs of the road ahead. It’s a powerful tool that supplies you with the data and insights needed to make better business decisions and achieve the company’s financial goals.

Predicting money inflow and outflow is important for businesses because it allows them to plan for expenses, make informed decisions about investments, and identify potential cash flow shortages that may require financing.

cash flow managemet challenges - maze with a red marker running through it

Cash flow forecasting challenges

Cash flow forecasting is a continuous process, and it's normal to face challenges along the way. However, with some effort and determination, you can overcome these obstacles and improve your forecasting skills over time.

But for now, here are three of the most common cash flow forecasting challenges to avoid:

1. Manual work leading to errors

According to Forbes, almost 9 out of 10 spreadsheets (88%) contain errors. Worse still, most of those errors are made by humans. If you think about it, it isn’t that surprising considering how much data entry many finance professionals carry out daily.

But why are these human errors so common?

Well, one of the main causes is a lack of proper training in the software and its capabilities, which can lead to mistakes such as:

  • Using the wrong formulas or functions
  • Inputting incorrect data
  • Omitting important information
  • Not following proper formatting
  • Not using proper controls

With the complexity of financial spreadsheets, it's easy to overlook small errors that can have a big impact on outcomes. Therefore, it's crucial to have a system of checks and balances in place and to regularly review and audit spreadsheets.

Better yet, you could leave manual data entry in the past and move to new technologies to help automate repetitive tasks and minimize errors.

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2. Not updating forecasts regularly

Once you've created a cash flow forecast, it can be easy to let it collect dust. However, it's important to regularly review and update your forecast to make sure it stays accurate and relevant.

After all, market conditions, business operations, and financial performance can all change quickly and unexpectedly.

An outdated cash flow forecast won’t reflect these changes, which can land you (as the person or team responsible for forecasts) in a heap of trouble.

Regularly updating the forecast lets you anticipate and plan for changes in revenue, expenses, and other financial transactions.

3. Struggling to juggle data in multiple sources

One of the most common cash flow forecasting challenges is when the data you need to complete your job is dispersed across multiple sources and systems.

There’s nothing more frustrating than having to go and locate all that data. Aside from being incredibly time-consuming, collecting data from various sources across the company can lead to inaccuracies and inconsistent data.

A possible solution is to use a centralized system for data management. This can be software or a database that allows you to collect, store, and analyze data from multiple sources in one place.

Centralized data management systems can help you standardize and automate data collection, as well as improve data accuracy. You can also try out some of the more advanced features that often come with centralized data management systems. Some of these include things like data visualization, reporting, and collaboration tools, which can help you make sense of the data and share it with others.

A centralized data management system is a great way to streamline your data collection and management process and make your life a little bit easier.

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7 tips to improve your cash flow forecasting process

Forecasting is an essential tool for managing the finances of any business. However, it can also be a difficult task. But by understanding the common challenges of cash flow forecasting and how to overcome them, you can start taking the right steps to make more accurate predictions.

Here are a few tips to help you do just that:

1. Use accurate and reliable data

The quality of your forecast depends on the accuracy and reliability of the data you use. So, make sure to use data from all relevant sources, such as financial statements, invoices, and bank statements, and validate the data for completeness and accuracy.

2. Use a consistent and comprehensive forecasting model

A consistent and comprehensive forecasting model ensures your forecast is accurate. Not to mention, it'll also let you make meaningful comparisons between different periods.

3. Incorporate a range of scenarios

Include a range of scenarios in your forecast, such as best-case, most likely, and worst-case scenarios. This will give you a more complete picture of the potential outcomes and allow you to plan for a range of possibilities.

4. Regularly review and update your forecast

Your cash flow forecast is a living document and should be regularly reviewed (once per month, for example) and updated to reflect changes in the business environment.

5. Communicate with other departments

Collaborate with other departments, such as sales, operations, and marketing, to understand their plans and how they might impact the cash flow forecast.

6. Use technology to automate and streamline the process

Automating the forecasting process can help reduce errors and improve accuracy.

7. Continuously learn and improve

The markets are constantly changing, so it's essential to stay current with the latest forecasting techniques, best practices, and trends, and continuously improve and adapt your process.

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