9 reasons why your cash flow forecast is never accurate
When it’s done well, cash flow forecasting is an excellent tool for helping businesses to monitor their cash flow effectively and gain the insight to make key decisions or put plans in place to cover any impending cash flow shortages.
However, many businesses struggle with this important task – particularly its accuracy – which can mean they’re left with a shortage of working capital when they need it most.
So, here are nine reasons why your cash flow forecast might not match your business’s performance, plus tips on how to be more accurate in the future and address any cash flow shortages.
1. You don’t include everything
Your cash flow forecast needs to be as comprehensive as possible to be accurate. But, with so many incomings and outgoings to consider, many businesses understandably let some slip under the radar.
For example, whilst large expenses often make it onto the list, small expenses are often forgotten about. A few pounds here and there doesn’t seem life-changing but these small expenses can quickly add up to become a large figure.
Likewise, a single late payment might not seem like much, but when you have more than one it could leave you short if you encounter a difficult period.
2. You forget about payment terms
Sending an invoice or purchasing goods doesn’t always correlate with the exact time the money enters or leaves your bank account. However, many businesses ignore these timings, making their forecasts inaccurate.
For example, if you issue an invoice in August with 60-day terms, the payment won’t enter your account until October or later. Purchasing goods on credit also means that the financial impact will not be immediate. To get the best possible idea of your cash flow, factor in these timings to all of your forecasts.
3. Your predictions are unrealistic
Cash flow forecasting is essentially a guessing game, which is why many businesses find it challenging. But the key to success is being realistic with your estimations.
Whilst it’s tempting to over or underestimate to meet your goals, this could leave you in a difficult situation. So, be as realistic as you can be to give your business the best possible chance of success.
4. You only forecast for one situation
With so many variables to consider and a level of uncertainty to factor in, there is always going to be some variation between your forecast and actual cash flow. By forecasting for multiple scenarios, you can be prepared whatever the outcome.
To do this, take an educated guess at a base scenario and then create additional forecasts for 10% higher sales and 10% lower. This allows you to see the best and worst outcomes for any given period so that your business can be prepared.
5. You ignore variable costs
There are certain business expenses such as utility bills that will vary throughout the year. Ignoring these seasonal fluctuations could distort your estimates and leave you in a difficult position when payments need to be made. Be sure to include these variations so that you are prepared for all circumstances.
6. You rarely update your forecast
To be as accurate as possible your financial forecasting needs to be updated every time something changes that will impact your cash flow.
For example, two situations that will significantly affect your cash flow forecast include late payments and increased sales. If an invoice has exceeded terms or a new product is performing better than expected, update your forecast to reflect this.
7. You look too far into the future
The further into the future you forecast, the less accurate your predictions will be. This is largely because it’s impossible to predict what impact economic changes will have on your business when you can’t know what’s coming.
It’s often best practice for your forecast to cover the next year, and any longer is probably unnecessary. But remember all businesses are different, so find a time period that works for you.
8. You never compare your estimations with the reality
One of the easiest ways to spot why your cash flow never meets your expectations is to compare your past forecasts alongside what actually happened. This direct comparison can identify where your forecasting is going wrong and help you to improve your forecasts going forward.
9. You don’t take the steps to make improvements
It’s great if you’ve reviewed your cash flow forecast and found areas that can be improved in the future. But if you don’t take the steps to make these improvements, it’s a pointless exercise. Learn from your experiences and your cash flow forecasting will benefit greatly.
Managing your cash flow
Should your cash flow forecasts identify potential shortfalls, it’s important to act quickly and take steps to mitigate or avoid them. Cash is King, remember, and poor cash flow is one of the most common reasons behind business failure.
Break things down into your incomings and outgoings, then consider if there any obvious and quick wins to improve either – which aren’t going to negatively impact other areas of your business.
If your business trades on credit terms, identifying ways to get paid sooner by customers can be a big help in this regard. Take a look at your sales ledger and in particular the overdue column. If your customers are failing to pay on time, this is a great place to focus your attention and increase your efforts to encourage customers to pay.
Should your internal efforts still not work, consider instructing a debt collection agency. They can bring expertise and weight to your collections efforts and can often provide the motivation your customers need to pay – all whilst removing the burden from your business, and typically with the comfort of a success-based fee.