What To Do When Your Cash Flow Forecast Is Wrong

The cash flow forecast is a critical report for a business of any size or niche. Because it shows how much money you’ll receive and disburse in a given period, the cash forecast serves as a touchstone for decisions about acquisitions, payroll, investing, marketing, and more. If this vital report is inaccurate, the fallout can be potentially dire for your business.

Leaders of financial teams are increasingly encouraged to take a seat at the table to help make strategic decisions. One of the challenges of the heightened visibility is the expectation of accurate reports. An inaccurate cash flow projection can harm the company and tarnish the reputation of its accounting and AR departments.

When your cash flow forecast is wrong, the first thing to do is understand why it’s flawed.

Commons Reasons for an Inaccurate Cash Forecast

One survey by Deloitte and Kyriba found that 53% of professionals polled admitted their cash forecasts were only "somewhat accurate." Roughly one-third of respondents believed their cash estimates were accurate with "some variance, but not significant," while 8% admitted their projections were "very inaccurate."

Imperfect cash flow forecasting can be due to internal or external factors, including:

• Changes in receivables or payments. When customers don’t pay their invoices, you have AR on the books that align with your sales budget, but no commensurate cash. When customers don’t pay what’s owed, cash flow is misaligned.
• Discrepancy in amount received. Another disconnect comes when customers pay their invoices. This might be because of a simple payment error, discrepancy, or a cash shortfall.
• Unplanned tax liabilities. Unexpected cash outlays can result from errors by your tax professional, unscheduled assessments, penalties, or disallowed deductions or expenses on prior year tax returns.
• Manual processing errors. Manual tools such as Excel are inherently error-prone. If your team compiles the cash flow forecast manually, flawed data entry, imprecise formulas, and transposition are just a few potential issues.

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How to Create an Accurate Cash Forecast

It's imperative that your cash flow forecast is as accurate as possible. A study by U.S. Bank found that cash flow problems are to blame for 82% of small business failures, and it's not only small businesses that feel the pain of inaccurate cash flow. Depending on the extent of the misestimate and contingency options, financial shortfalls can devastate businesses of all sizes.

After understanding where your cash forecast went wrong, the next step is to ensure you do better next time. More precise cash flow projections begin with best practices. Here are three to consider:

1. Assess your sales pipeline. Examine upcoming deals to determine if they will culminate and when sales should begin. Consider issues that could affect anticipated revenue from existing customers.
2. Understand expenses. Cash outlays flow to fixed and variable expenses and debt obligations. Ensure your forecast uses the most up-to-date budget information and input from department heads.
3. Automate AR collections. Use an automated AR tool to stay on top of late-paying customers, more accurately predict payment of outstanding AR, and avoid a cash crunch from overdue AR.  

Sales team visibility in the collections process can improve AR payments, lower DSO, and improve the customer experience. That adds up to more reliable cash flow forecasting. Using an automated AR solution frees up your accounting and finance teams to focus on customer service activities, reporting, and key performance metrics without the strain of manual AR management. When your cash flow forecast goes awry, it's essential to have the right financial tools in place – consider integrating with an ERP such as NetSuite or Acumatica for improved cash flow management and accuracy.

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