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Cash forecasting is critical in managing any business yet many struggle with accurate projections – or worse, with forecasting at all. An inaccurate – or no – forecast can lead to shortages, missed opportunities, and unnecessary borrowing. Even if you’re one of those rare business that’s drowning in cash and doesn’t worry about shortages, you can miss the chance to get at least a short-term return.

The good news is that you don’t need to spend hours a week to get solid results. Once you get a process in place, 30 minutes a week or so can improve the accuracy of cash flow projections and help avoid shortages or missed opportunities. Here are some key questions and approaches:

1. What’s coming in?

Start by assessing the cash expected to come in over the next week or month. Look at outstanding invoices, expected payments, and sales forecasts. It is important to regularly check your accounts receivable aging to see what invoices are coming due and to follow up on late payments. It might be uncomfortable to approach customers about late payments, but as the saying goes, the squeaky wheel gets the grease. Our observation is that those that are cash flow challenged tend to pay the quiet vendors last.

Keep a list of any regular ongoing and recurring sources of revenue and their expected timing. Make sure to be up to speed on any new transactions or arrangements that could impact incoming cash.

2. What’s going out?

Next, assess your cash outflows. Make sure invoices and liabilities are entered on a timely basis, then run an aging to make sure you are staying on top of things. We have seen more than one company (usually smaller) enter invoices only when they are ready to pay them, keeping stacks on their desk or wherever they find the space. It can be a challenge for them to figure out what they actually owe, and when. Take into account fixed costs like rent, utilities, and payroll; variable expenses such as supplier payments and operational costs, and; debt and other payments

3. What could go wrong?

This might sound like the theme of a business horror movie, but the real-world doesn’t always honor our about plans. We have seen organizations take little consideration of the unexpected such as late receivables, changes in demand, loss of key customers, supply delays, or other unexpected events, and get in a bind when they inevitably pop up. And while we’re on the topic of horror movies, the impact of natural disasters such as fires and hurricanes are increasingly in the news. Honest to goodness, Dorchester County in South Carolina is home to an annual Hurricane Expo, complete with bounce houses for the kids and food trucks. If you are on the way to the Hurricane Expo and realize you don’t have a reserve of cash or borrowing ability, it might be time to head back to the office. Wherever you are, set aside a rainy-day cushion in cash or borrowing capacity to get you through the unexpected.

4. What are the tools?

Use technology to streamline and simplify the process. Whether it’s an Excel spreadsheet or a dedicated cash flow forecasting tool, keep your model updated with the latest data. Many software systems have built-in cash forecasting models (which we occasionally see unused), and helpful add-ons may be available.

Wrapping it up

It may take a minute to get a process going depending on what tools and practices you have in place, but once you are set you’ll be surprised at how quickly it can go if followed up on regularly.

One final point for those doing the forecasting, typically the accounting team: Communicate, communicate, communicate. Accountants typically record cash received and pay the bills but they don’t initiate the transactions. Make sure those who make the decisions stay involved. Morrison has helped many organizations get their cash management in order, whether it be developing cash monitoring procedures, reviewing loan agreements, or assessing future needs. We are always happy to discuss these issues with anyone.