Cash flow forecasting is a vital skill for any business, especially in a rapidly changing market. It helps you plan ahead, manage your cash flow, and avoid financial problems. But how can you make accurate and reliable forecasts when the market conditions are uncertain and volatile? Here are some best practices to follow.
The first step is to identify the main factors that affect your cash flow, both positively and negatively. These could include sales, expenses, inventory, accounts receivable, accounts payable, taxes, and debt repayments. You should also consider external factors, such as customer demand, competition, regulations, and economic trends. By understanding your cash flow drivers, you can better anticipate how they will change in the future and how they will impact your cash flow.
Nonprofit Finance Directors face unique cash flow challenges in rapidly changing environments. Key practices: Diversify Revenue Streams: Seek income beyond grants for stability. Build Reserves: Maintain a fund for months of expenses. Scenario Planning: Create scenarios for proactive decisions. Grant Management: Manage grants efficiently, stay in touch with grantors. Cost Efficiency: Continuously review expenses, optimize operations. Collaborative Partnerships: Form resource-sharing partnerships. Transparent Reporting: Foster trust through clear financial reporting. Continuous Monitoring: Regularly assess and adapt strategies. Proactive cash flow management empowers nonprofits amid uncertainty. Regenerate
In the ever-changing world of construction, Cash flow is the key for a viable business. To keep on top of this I spend a great deal of time studying economic reports and seminars provided by the big 4 banks. This allows me to steer the company marketing towards the sectors of the market that will be most active. In 2010 this was the Homebuilder Grant & First Home buyers whereas now in 2023 we see the cashed-up Gen X couples moving to Cairns thus the 2nd or 3rd home buyers who have cash to spend coming out of long lockdowns in Melbourne and relocating to sunny Queensland. 2024 will take a new turn and these seminars and economic reports allow me to have an idea on which direction the company will need to concentrate on.
Using rollover forecasting techniques which enables continuously updated forecasts to reflect dynamic conditions and improve accuracy and efficiency.
The next step is to create different scenarios for your cash flow forecasting, based on different assumptions and expectations. For example, you could have a best-case scenario, a worst-case scenario, and a most-likely scenario. This way, you can prepare for different outcomes and test the sensitivity of your cash flow to various changes in the market. You should also update your scenarios regularly, as new information and data become available.
Scenario based cash flow is best in volatile circumstances. COVID was the best time to use it when you had no clue what was going to happen tomorrow, next week or next month.
The 80/20 rule, also known as the Pareto principle, states that 80% of the effects come from 20% of the causes. This means that you should focus on the most important and influential cash flow drivers, rather than trying to account for every detail and variable. By applying the 80/20 rule, you can simplify your cash flow forecasting and make it more efficient and effective. You can also use it to prioritize your actions and decisions, based on the impact they will have on your cash flow.
Another best practice is to use the right tools and methods for your cash flow forecasting. Depending on your business size, complexity, and needs, you may use different software, spreadsheets, or models to create and analyze your forecasts. You should choose the tools and methods that suit your objectives, preferences, and resources. You should also ensure that your tools and methods are accurate, reliable, and consistent. You should also validate and verify your forecasts, by comparing them to historical data, industry benchmarks, and expert opinions.
The final best practice is to communicate and collaborate with your stakeholders, such as your team, your customers, your suppliers, your investors, and your lenders. By sharing your cash flow forecasts and assumptions with them, you can get their feedback, input, and support. You can also align your expectations, goals, and plans with them, and avoid any surprises or conflicts. Communication and collaboration can also help you identify and leverage new opportunities, as well as mitigate and resolve any risks or challenges.