How do you conduct cash management and forecasting for your business? It is important to have a good understanding of how money is flowing in and out of your company, not only so you can work towards a profit at the end of the year, but because strategic decision-making and business development projects require resources. However, many companies make the mistake of confusing highly detailed financial reports with sound cash management.
Put down the microscope!
With a couple of decades in the financial business under my belt, I’ve seen all kind of ways companies try to keep a handle on their finances. One of the more problematic strategies I’ve come across is when the owner or CFO feels the need to monitor every expense, invoice and debtor week by week to ensure the business stays afloat. I’m sorry to say that if you need to scrutinise every expense at this level of detail, then you have bigger problems than cash management on your hands!
I truly believe that only small companies and start-ups should be looking at cash at a transactional level like this and that designing big, complicated models for reporting on every bit of cash coming in and out of the company is a fancy plaster for a more serious problem – your business is not financially sound.
What do effective cash management and forecasting look like?
There are two main types of forecasting: medium-term forecasting and immediate cash flow forecasting:
Immediate cash flow forecasting
As you would expect, this is looking at what is immediately happening to your finances. Immediate cash flow forecasting focuses on financial activity from week to week at a micro-scale. This would involve forecasting the financial details such as when is the best time to pay VAT, when to pay invoices, when to pay wages, when debtors pay, etc.
This is budgeting that typically extends across one to three years. This is when you put the microscope away and instead look at overarching patterns with regards to profitability, expenses and, ultimately, cash flow. Cash management shouldn’t feel like a panic from month to month, but rather something which is kept an eye on and slotted into a wider view of your company’s financial health. Medium-term forecasting is great for the development and support of business plans and strategies while allowing for new opportunities when a period of surplus comes around.
I recommend focusing your time and energy more on medium-term forecasting. Of course, keep an eye on month-to-month trade and check if you’re meeting your targets, but what is important is that one bad month doesn’t mean you can’t do the payroll! If that’s how tight things are at your company, then you need to take a hard look at your business as a whole rather than obsessing over every small transaction.