In the intricate world of financial management, leveraging technology has become a non-negotiable for teams looking to boost their financial operations. A key activity for finance teams is the tracking and forecasting business cash flow.
Utilising Cloud technology for cash flow analysis empowers businesses to generate highly accurate forecasts. In this article, we’ll take a deeper look at how to use such systems effectively for this purpose.
What is cash flow forecast?
A cash flow forecast stands as an extensive financial instrument used by businesses to gauge the funds they expect to receive and expend during a designated period. It forms an integral aspect of financial planning, yielding perspectives into the future financial well-being of the company.
In contrast, cash flow forecasting is a forward-looking process that aims to predict future cash movements and balances. This involves approximating the volume of cash entering and exiting a business over a specific forthcoming time span.
Forecasting cash flow holds significant importance as it helps a company dodge potential cash shortages, although it's not a straightforward task since accurately predicting future income and costs can present considerable challenges.
It's crucial to understand that a cash flow forecast relies on predictions, not certainties. Consequently, it should be consistently revised to mirror the most precise and up-to-date financial data accessible.
Such financial forecasting serves as a guide, helping direct businesses towards financial stability and expansion.
Why is cash flow forecasting important?
Cash flow forecasting stands as a very important tool of financial management in any business. It provides a forward-looking assessment of the company's financial well-being. Through the estimation of future cash inflows and outflows, it empowers businesses to anticipate periods of potential cash deficits or surpluses. This proactive approach equips companies to make informed choices regarding investments, expansions, or cost-saving measures.
Furthermore, a well-structured cash flow forecast can serve as a compelling factor when engaging with investors or creditors, showcasing the company's financial expertise and foresight. In essence, cash flow forecasting is not merely about upholding financial stability but also about coming up with strategies for growth and sustainability in a competitive market.
How does Cloud technology track and improve cash flow?
Efficient cash flow management demands a comprehensive grasp of your company's financial status. To attain such transparency, the finance team requires an advanced digital tool capable of monitoring the available funds and their allocation.
Given the current economic conditions, both large and small enterprises are actively pursuing dependable financial models for projecting future financial standings. Various technologies, including APIs, AI, and machine learning, are now available to facilitate real-time cash flow analysis. But what precisely do these technologies entail?
Application Programming Interface (API)
This is the computer interface between multiple software platforms, which can be set up to move a group of data from A to B using defined parameters. It allows the data to be extrapolated and then used by other reporting programmes.
Artificial Intelligence (AI)
Artificial intelligence is very well capable of disrupting finance, as it is starting to take care of a lot of manual tasks without the need for human intervention. It is used to improve predictions based on the raw data provided by APIs for example.
Machine Learning (ML)
This is a subset of AI in which information is learned without being explicitly programmed. It’s particularly helpful for learning repeat invoicing patterns within financial management or absence patterns within people management.
Financial drivers you can monitor with cash flow forecasting
As cash flow is crucial to your business's success, an understanding of the factors that influence it are key. There are several drivers that provide a unique insight into where your cash flow might be heading.
Revenue growth percentage
Revenue growth percentage is a key financial metric for cash flow forecasting that indicates the rate at which a company's sales income increases over a specific period. It's calculated by comparing the current revenue trends to that of a previous period. Businesses use this metrics as a financial driver to anticipate high or low revenue periods, and to strategise accordingly, whether for investments and expansions or planning cost-saving measures.
Rent, internet, phone bills, energy, and payroll are all overhead costs that occur each month. But just because they are monthly expenses doesn't mean they always incur the same amount. For example, the cost of electricity can quickly rise when it is unseasonably warm or cold in the office.
You should track your actuals against budgets to maintain your overhead percentage.
Price change percentage
Price change percentage represents either a cost increase, decrease, or temporary reduction. This is pivotal for maintaining business profitability amidst the ever-evolving cost-of-living. Factors such as petrol prices and food costs can be unpredictable, so companies need to monitor and act adaptably. . If profit margins are eroding, it signals a need for rate reassessment.
Work in progress days
When dealing with a service-based organisation, work in progress days refer to the period between wages and materials being paid for and the job being finished/invoiced. For product-based organisations, inventory days refer to the average number of days a product is on hand before it is sold. The easiest way to improve cash flow here is to boost workplace productivity via streamlined task management.
Accounts receivable days
If a payment is made on credit terms, the accounts receivable days represent how long it takes for the customer to pay. Invoices may have a repayment term of 30 days, but unfortunately customers don't always pay on time. This kind of discrepancy can adversely affect cash flow.
Accounts payable days
Accounts payable days are the average number of days it takes to pay vendors or suppliers. Suppliers may be paid faster than you receive money from customers, which could cause cash shortages. In this scenario, a business will not be able to operate indefinitely if they don’t have cash reserves in the bank.
Cash flow forecasting benefits for business
We’ve touched upon the benefits of effective cash flow forecasting, but what specific business advantages does technology provide in this endeavour?
Accurate data via automation
Cash flow analysis and reporting can all be done digitally today. When digital finance systems are fully-integrated and automated, data can flow freely with no mistakes, in real-time too.
Track cash more easily
Every transaction is visible, each account can be managed, and anomalies can be flagged with ease. Manual tracking can take hours. But tracking cash with Cloud technology is instantaneous, providing quick and easy access, an overarching perspective, and more cohesive financial practices across the whole team.
Provide stakeholders with access to cash analytics
When finances are consolidated into a single accounting system, decision-makers can find the necessary transactional information without the need to go back and forth between various functions. The whole business and all stakeholders can access this data and improve their grasp of spending patterns and the overall financial performance.
Limitations of cash flow forecasts
While cash flow forecasts are invaluable for business planning, they are not without limitations which finance functions must consider.
Limitation #1: Accuracy depends on quality of data
Accuracy largely depends on the quality and relevance of the data being used. If the underlying data is inaccurate or outdated, the forecast will not reflect a true picture of future cash flow. However, this can be avoided with strong data quality management processes that improve data and training your finance function in data cleaning.
Limitation #2: Unpredictable external factors
Not everything can be accounted for in a forecast, no matter how good your modelling/reporting is. External factors such as economic downturns or market changes could happen out of the blue. These unforeseen circumstances can significantly impact your cash flow. However, businesses that use financial forecasting software are more likely to survive over the long-term, as they can adapt quicker if similar patterns emerge in future.
Limitation #3: Time-consuming process
Creating a detailed cash flow forecast can be a labour-intensive and time-consuming process if you don’t have the right tools. Especially for complex businesses with multiple revenue streams and cost centres.
Is your cash flow forecasting serving your business?
As a key financial responsibility, cash flow forecasts must serve your business and be able to handle multiple data streams or industry specific metrics.
The limitations above can be mitigated with the use of Cloud-based financial management software. Cloud forecasting tools automate data collection and analysis, with up-to-date data, which increases accuracy and saves time for businesses. Businesses need to incorporate historical trends and market analysis to better predict external influences and prepare.
Accounting software, like Advanced Financials enables organisations to do just that. It derives insights through real-time reporting, with a previously unattainable level of detail with their cash flow KPIs. Armed with this information, CFOs can plot and modify their strategies and revamp finance processes in an agile manner to ensure business success and future-proof the finance function.