8 Critical Activities Supported by your Cash Flow Forecast

With a robust and reliable cash flow forecasting process these separate tasks and activities focused on managing cash flow risk and reporting within your business can be streamlined through a single process.

If you are considering making improvements in cash forecasting in the coming months and are building out the business case to support any change you want to make, it would be worthwhile considering whether and of the following activities can be supported or enhanced by these improvements:

1. Identifying cash shortfalls

Helping you identify where and when cash shortfalls will arise within your business is the single most important insight your cash flow forecast will give you. In this regard, it’s a critical risk management tool. The further the cash flow projection and the more accurate the output, the better you’ll be able to identify shortfalls before they become a problem.

2. Managing working capital

The better your cash forecast, the more effectively you’ll be able to manage working capital within your business. Effective working capital management, that makes the best use of your short term assets and liabilities, notably debtors and creditors, is a crucial part of a sustainable cash management strategy that will protect your business into the future.

3. Predicting bank covenants

Cash is a critical input to bank covenant calculations such as leverage ratios which take net debt (debt minus cash) and earnings as inputs. Cash can be the biggest variable in these calculations and a robust forecast will help predict and manage this number into key reporting dates, while allowing you to reliably guide key stakeholders every step of the way.

4. Minimising debt levels

In the current environment, the best return you can achieve on your cash is by using it to reduce debt levels and ultimately interest costs. An accurate and reliable cash flow forecast plays a crucial role in optimising cash and debt levels in an efficient and safe manner. Without reliable future visibility over cash flow, you won’t be able to truly achieve the return you can from your excess cash.

5. Foreign exchange hedging

If you do business in foreign currencies, either receiving them from customers or paying them to suppliers, you have a foreign exchange risk. There have been major moves in currency markets in recent months which has only heightened this risk.

A cash flow forecast that projects cash on a per currency basis will allow to see where you have risk and take appropriate action to either hedge or simply closely monitor. The cash flow forecast will give you a holistic view of your foreign exchange risk.

6. Acquisition planning

A medium-term cash flow forecast will be an essential part of planning for a single or multiple acquisitions. A view of what cash is available to both fund the acquisition and then fund the business post-acquisition will be provided by the cash flow forecast. This is doubly important for businesses who are highly acquisitive.

7. Management reporting

Expect cash flow to be top of mind for the executive management in your company throughout 2023 and likely beyond. As a result, also expect the demand for cash flow reporting, in particular cash flow forecasts, to increase. A solid cash flow forecasting process will give the confidence to not only react to these requests but to actively contribute to the strategic conversation in your company.

8. External stakeholder reporting

You can also expect scrutiny of cash flow from external stakeholders such as banks, investors and shareholders to increase. This will be to monitor both the financial health of the business and to see what cash can be extracted in the form of dividends as the demand for short term returns also increases. A cash flow forecast will allow you to respond to these queries while also monitoring the impact of any shareholder disbursements.

Interested in replacing your cash flow spreadsheet monster?

Find out how CashAnalytics can automate your cash forecasting and reporting process which will you to meaningfully the support the activities outlined above.