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How Accurate is your Cash Flow Forecast?

Posted by Gil Oliva on Wed, Jul 01, 2015 @ 08:30 AM

It is a common problem for companies to find their cash flow forecast is less than healthy, with errors and discrepancies showing up at the end of the year. Sometimes it comes down to items that are omitted, sometimes it is elements that take you by surprise, or sometimes it is simply that you have not been conservative enough in your estimation, assuming a higher percentage of sales than actually occurs. So what are some of the most common reasons for inaccuracy?  

Cash flow forecastEstimated Accounts Receivable Payment  – it is possible not only to be overly optimistic about the amount of sales your company will achieve, but also about how quickly your customers will pay. Each day your customer pays late puts further pressure on your cash flow, and makes your forecast a little less accurate. Consider a customer who has traditionally paid on time, but starts paying late. If the amount is significant, that late payment could take you into a new payroll period and create problems with on-time employee payment, which is something you want to avoid at all costs. 

Realistic Commodity Pricing – while commodity pricing can be somewhat controlled by negotiated supply contracts and price protection agreements, managing price volatility can sometimes prove to be a challenge. It pays to be conservative when estimating your cash flow needs. 

Changes in Operational Costs – look at your costs for the past year, and make sure to take into consideration all the planned costs for the year ahead. Sometimes a few of these costs are not included due to poor inter company communication. For example, new marketing campaigns or a new cost element such as promotions via social media. It is vital that every department of your company contributes by providing their projections and costs for the year ahead. Have you allowed a cushion for the unplanned expenses? 

Payroll – you may wonder how payroll could be inaccurate. It is easy to forget a shift in employees, and the potential added cost should one employee leave. The new hire may cost more, or require a signing bonus. While the financial rewards in terms of productivity from new hires may be greater than their departing peers, it is hard to quantify when planning ahead.

Cash flow planning is an integral part of your business. Make sure you allocate enough time to putting it all together. Also take time to make comparisons between projected and actual cash flow, that way there should not be too many discrepancies and you will be prepared for the unplanned expenses.

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Topics: Accounts Receivable Management, Cash Flow management

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