Cash flow forecasting is an absolute necessity, but that doesn’t always mean you’ll walk through the process without challenges or roadblocks. From data overload to inaccurate numbers to the need for many departments to come together, potential issues are lurking around every corner.
Even though cash flow forecasting challenges are common, it doesn’t mean you have to give in and hope for the best. You can fight back by understanding these challenges—including why they occur—and potential solutions for addressing them.
Let’s take a look at five common challenges in cash flow forecasting.
1. Lack of a Dedicated Team
It’s easy to delegate cash flow forecasting to a junior team member in order to free up time for senior employees to focus on more time-sensitive tasks.
It’s just as easy to bog down senior employees with cash flow forecasting-related tasks. But taking this path may cause you to fall short in other areas.
This leads you to address the question of which team member(s) should take the reigns. It varies from company to company, but the best approach is to choose a select few individuals to manage all cash flow responsibilities. Choose individuals who are familiar with your current finances and financial history. It also helps to select employees who have assisted with or overseen cash flow forecasting in the past.
If you have too many hands on the project—especially those who are inexperienced or unfamiliar with the company—roadblocks have a way of coming to life. The best way to hedge this problem early on is by selecting a dedicated team.
2. Non-Participation of Departments
Open, accurate and honest communication is critical to cash flow forecasting success. If even one individual or one department neglects to participate—or takes a lackadaisical approach—it can affect the entire process.
The benefits of full participation include:
- More accurate forecasting
- Time savings
- The spread of financial understanding throughout the company
Although multiple departments must share data for accurate cash flow forecasting, it’s essential to have one leader. With Vena, the head of every department can share the applicable data with the person managing the process as a whole. From there, our intuitive dashboards and reporting features can help create real-time, long-term forecasts within a matter of minutes.
3. Using Inaccurate Data
Inaccurate data is the quickest way to bog down cash flow forecasting. If you don’t have accurate numbers, you don’t have accurate projections. You can take a variety of measures to protect against this, such as:
- A weekly or monthly review of numbers with an eye toward accuracy
- Remaining in tune with cash flow patterns, with a focus on unexpected changes
- Maintaining a single point of contact for each department
During review sessions, compare the numbers against your projection so you can adjust accordingly. And to reduce friction, implement a cash flow forecasting tool that can automate this process throughout your company.
The use of Vena’s built-in templates can standardize the collection and input of data, thereby reducing the risk of error. Here’s how we describe this feature on our website:
"Input and manage individual assets by properties such as book value, useful life, residual amount and more. Calculate and preview asset depreciation projections prior to submission. View existing assets and add future ones by project, department or cost center for increased flexibility."
In the world of cash flow forecasting challenges, there’s none greater than the ability to collect and manage accurate data.
4. Ignoring Historical Data
A cash flow forecast that’s not supported by historical data is nothing more than a “shot in the dark.” Historical data—no matter how much is available to you—should always be part of cash flow forecasting. A look into the past can help you see into the future.
When combined with in-depth research, you’re more likely to make accurate projections. Take for example an overzealous sales projection. If you have good reason to believe you can reach your projection—which should include historical data and information from your sales team—it’s okay to set a lofty goal. However, if your projection is too far out of reach, it can result in a cash shortage and negative consequences across the business.
Historical data can help with scenario planning, as it allows you to test variables that can impact your business in the short and long term.
Vena’s scenario planning and analysis software provides instant “what-if” analysis based on your inputs. This allows you to analyze the impact of potential changes such as sales, revenue and employee count.
5. Ignoring Tax Liability
As sales, revenue and cash flow change, so do your tax liabilities. For instance, when your revenue spikes, your business may be responsible for paying additional taxes. Conversely, if you’re faced with declining revenue, your tax liability may decrease.
Also, take into consideration the ever-evolving tax system, with changes regularly made at the federal, state and local levels.
Ignoring tax liability during cash flow forecasting will come back to haunt you (likely sooner rather than later). Understanding your current tax liability and how it could change in the future will help you better structure your cash flow forecast.
Tip: If you don’t have the workforce in house, hire a tax professional to review your financials and assist with projections.
Regain Control of Cash Flow Forecasting Today
Every detail of your business—no matter how big or small—affects its budget and cash flow. If you let these cash flow forecasting issues dictate your approach, it’s impossible to make accurate and realistic cash flow projections.
On the plus side, you can regain control of cash flow forecasting and related processes with Vena’s CapEx and OpEx software. It’ll save you time and money as well as reduce the stress that accompanies cash flow forecasting within your company.