The Four Cash Flow Forecasting Blunders That Lead to an Inaccurate Financial Picture
Cash flow forecasting is a powerful tool for businesses of all sizes. To make it all the more effective, avoiding these common mistakes is crucial. Making projections can be incredibly beneficial for controlling the financial situation in a business. Because of this, financial reports are the most important aspect of company accounting.
The forecast serves as a foundation for future strategies and plans. Unfortunately, there are some mistakes commonly made in the process. If a cash flow forecast isn't done properly and fails to illustrate crucial financial trends, it can prove quite damaging to a business.
In this article, we'll examine some of the pitfalls of improper cash flow forecasting that are most likely to put a company in turmoil.
Mistake #1. Incremental Income Line
Since cash flow forecasting depends on the income from business operations, projections of the incoming cash must be handled with care. And a common mistake when it comes to this aspect is making the income line incremental.
For example, setting growth goals from one percentage to a higher one isn't enough. A correctly done income projection should rely on such contributors as prices and volume while considering different divisions.
In this way, the forecast will better reflect business performance and simultaneously raise attention about potential issues.
Mistake #2. Inaccurate Data
Cash flow forecasting can't be effective if it provides outdated data. Yet, many businesses fail to update their projections regularly.
If there's a large discrepancy between the actual numbers and those entered in the forecast, issues could amass.
Updates to the cash flow forecast should ideally be done weekly. When the projection is updated that often, it might not be a perfect forecast but it will vary only slightly.
Mistake #3. Not Calculating Differences
Difference calculations can provide valuable insight and prove quite useful for devising a business plan. For that reason, a well-made cash flow forecast should include those calculations.
It's even more efficient if they are expressed as percentages, as these will make certain expenses impossible to overlook and present a clearer picture than just considering numbers.
Mistake #4. Sticking to One Scenario
It's always advisable to consider various ways certain business aspects can develop in the forecast period.
For example, if sales projections are overestimated, the whole projection will quickly prove unreliable. That's why it's vital to consider different scenarios when creating a cash flow forecast, with a particular focus on the worst-case scenario.
Many businesses avoid considering such cases, but those should always be predicted before moving forward. A realistic approach to the projection is ideal and it should be a product of considering both extremes - worst-case and best-case scenarios.
Create the Most Accurate Cash Flow Forecast
Meticulously working on the cash flow forecast will serve as an excellent platform for future business planning. Taking the relevant data into consideration and making the forecast straightforward and understandable is crucial for every company.
Although a forecast will rarely predict with absolute accuracy, it has the power to lead the company in the best possible direction.