Projecting cash flows is difficult because of the following reasons:
Cash is the lifeblood of a business. Thus it is essential to monitor it with cash flow forecasting. Following are some tips to improve your cash flow forecasts:
Understand the need for forecasting at your company, and learn the areas where it can provide its benefits. Input daily fixed and variable expenses and ensure it is up-to-date so that forecasting can be done accurately. Forecasting helps in reserving money or borrowing loans for cash deficit situations.
When planning and projecting your cash flow, remember that if you have investors, they’ll want to see high potential for ROI. It’s to everyone’s advantage that your reports demonstrate growing reserves of available cash over time. Logically, you want to make the case that the more your business spends today on growth, the more revenue you’ll see in the future. With this in mind, it might make sense to adopt a discounted cash flow (DCF) model, whereby market appreciation is taken out of the picture using dynamic logic.
Cash flow forecasts are affected by various factors like economic volatility and limited historic data that contribute to increasing the variance in forecast and hindering decision making. Prediction always comes with a high probability of uncertainty, so many firms lacking accurate forecasting processes express low confidence in their forecasts, especially long-term forecasts.
The mistakes while evaluating cash flow forecasts are:
Cash flow is difficult to track mainly because Accounts Receivable and Accounts Payable are unpredictable, making it difficult to forecast.
The factors that make A/R difficult to project are:
The factors above add to the unpredictable nature of A/R. The issues while forecasting arises due to the following reasons:
A/P is inaccurate in the long-term due to the following factors:
The unpredictability of the above factors leads to inaccuracy in the forecast. The challenges to forecast A/P are:
Thus, it is important to rely on automation that allows having a high-level view across various regions and cash flow categories; and consider Artificial Intelligence to predict A/R and A/P accurately, and generate forecasts efficiently and confidently.
The HighRadius™ Treasury Management Applications consist of AI-powered Cash Forecasting Cloud and Cash Management Cloud designed to support treasury teams from companies of all sizes and industries. Delivered as SaaS, our solutions seamlessly integrate with multiple systems including ERPs, TMS, accounting systems, and banks using sFTP or API. They help treasuries around the world achieve end-to-end automation in their forecasting and cash management processes to deliver accurate and insightful results with lesser manual effort.