In this webinar, Jennifer K. Richardson, CPA, and Joseph E. Rocco, CPA, review cash flow forecasting, which is critical for navigating what your company should do in uncertain times and how different scenarios will affect your cash flow positions.
Highlights from this webinar include:
- What Is Forecasting?
- Why Is Forecasting Useful?
- Assumptions and Questions to Consider
- An Example of Inflows and Outflows
- Actions to Take
- Best Practices
COVID-19 was a prime example of how uncertain times can lead to companies experiencing significant constraints on cash and working capital, including potential liquidity challenges. During the pandemic, many companies saw lower revenue resulting in less cash flow, along with a delayed collection of receivables as needs grew to step up payables to essential suppliers during. Companies had to become more nimble in managing inventory given the uncertainty in the supply chain, which also placed demands on working capital.
The information shared in this webinar is based on experience helping companies manage their cash and liquidity positions during high uncertainty. Below is a broad summary of the webinar.
What Is Cash Flow Forecasting?
Cash flow forecasting estimates the funds you expect to flow in and out of your business during a set period. There is an important difference between your income statement and your cash flow forecast. A cash flow forecast assists with projecting your financial position over time, while the income statement reflects expenses that you have already incurred.
Effective cash flow forecasting assesses multiple scenarios, often best and worst-case, over short and long-term periods. Cash flow forecasting is similar to a budget, so you should be using similar assumptions. However, budgets are usually for a year, while cash flow forecasts are for a shorter period and do not include non-cash items such as depreciation. Think of it as reconciling your bank account before the inflows and outflows happen.
Why Is Cash Flow Forecasting Useful?
During economic uncertainty, cash flow forecasting helps highlight periods where there could be potential cash shortfalls. This is helpful to know sooner rather than later to make decisions that will correct the shortfall. Examples of that could include adjusting the timing of payments to vendors or other necessary reductions to business expenses, which, unfortunately, can reduce the workforce.
Cash flow forecasting helps to aid in decision-making, especially when planning for future capital projects. It is a useful tool to aid in deciding whether to finance the project or to use cash on hand. Your model should show you when you will have a cash deficit to enable you to work with your lending institution early to prepare financing so that there is no delay to the project.
Cash flow forecasting is helpful to assess trends to assist with short and long-term financial planning. Projecting out actual trends is the best way to ensure that your forecast most accurately reflects your business cycle and, therefore, can be relied upon for financial planning purposes.
A cash flow forecast can help you determine where to allocate resources, to be most beneficial to your business. Cash flow forecasts with shorter intervals allow you to easily change assumptions to recalculate the model for different situations that arise.
A primary component of effective cash flow forecasting is to understand the minimum cash requirements in your business operations. An assessment of available cash and liquidity headroom is paramount.
Identify how much cash you have and whether it is restricted or readily available for use. Identify the critical cash flows that may be exposed. Awareness of cash reserves or shortages along with the liquidity position will be a starting point for identifying opportunities to protect and improve your position. Ensure you can answer the cash burn at the most likely projected low revenue level and the potential zero cash date under the worst-case scenario.
Assumptions and Questions to Consider
In times of uncertainty, it is important to have models that reflect different possible scenarios and outcomes. Be prepared to answer the status of your cash and liquidity runway today and what you anticipate during the next 90 to 120 days. Each model should have your assumptions clearly stated. Explore different “what if” scenarios such as a drop in sales or reduction in cash collected. Be prepared to revise them often.
It may be beneficial to probability weight various scenarios in your financial models. Update these probabilities and your assumptions going forward as more certainty and information becomes available. If you wait for the complete picture, it’s likely too late to steer the ship. Scenario planning gives you the confidence to make needed decisions and to shape communications about the response strategy.
It is essential to understand your potential cash and liquidity challenges. Try and understand what is happening to your top customers and how that impacts your forecasting? We recommend keeping open lines of communication with at least your top five customers. This will help you understand how a crisis has impacted their cash flow forecasting and what that means for your business arrangements.
It is also important to consider all potential sources of cash flows in your forecasting models. Consider different likelihoods with these assumptions. Review expenditures and explore whether creditors can defer costs or extend terms to provide short-term relief on cash flows.
Examples of Inflows and Outflows
- Cash from customer sales
- Accounts receivable collection
- Bank financing
- Sales of assets
- Sales of investments
- Investment dividends
- Payroll taxes
- Accounts payable
- Debt payments
Forecast cash flow scenarios by understanding which inflows and outflows are fixed and what can be restructured or optimized, resulting in maximized cash flow position.
- Develop multiple forecasts for multiple periods, both short-term and long-term, with different assumptions
- Update forecast with changes in actual results to make the most informed decisions
- Increase transparency with owners and lenders by regularly sharing the cash flow forecast. In times of uncertainty, it is especially important to share this information with your lender to show you have a plan and that you are actively managing the situation.
Watch the webinar for more details on Cash Flow Forecasting. In addition to the valuable content presented, area businesses are also given the opportunity to ask our experts questions about the Cash Flow Forecast Process.
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