So You Think You Can Make a Cash Flow Forecast?

So You Think You Can Make a Cash Flow Forecast?

Written by 
Trovata
March 30, 2020

So You Think You Can Make a Cash Flow Forecast?


Let’s not dance around the subject. Creating a cash flow forecast is anything but easy.

Cash, in addition to being the incentive on just about every game show, is the lifeblood of any business. Not having enough cash or mismanaging a surplus, could be a detrimental misstep. This is why cash flow forecasting is an extremely useful tool, especially for younger businesses that need to raise capital.

In this blog we will dive into the world of cash forecasting: what it is, why it is important, and how to implement one.

*SPOILER ALERT* We have created a cash flow forecast template for you, and have included it below.

I'll take Cash Flow Forecasting for 200, Alex.
What is a method of projecting future cash flows?

A forecast is a great resource for potential investors, and can help an organization prepare for and avoid future pitfalls. The forecasting process is typically managed by the Treasury department. However, in the absence of a Treasury department, a Controller might assume this role. There are a few different ways to approach cash forecasting. Today, we will be focusing on the top-down, and bottom-up methods.

In their blog, QuickBooks, explores the top-down cash forecasting method. “A top-down analysis starts with a business assessing the market as a whole. First you determine the current market size available for your business and factor in relevant sales trends. Then you can estimate how much of the market will buy your products or services.” When calculating expected market share, it is important to look at the market in three segments: total market available, serviceable market available, and serviceable obtainable market. Serviceable obtainable market or SOM should be equal to your sales target. Once the expected market share is calculated, the business can then use that data to project sales revenue and ultimately, expenses.

On the other hand, bottom-up forecasting takes an inside-out approach. This method is less dependent on external factors like the market, and places an emphasis on company specific data. When utilizing the bottom-up approach, a business estimates their revenue and expenses based on the resources they have on hand. Ernst and Young illustrates this approach in their cash forecasting guide. “Short example: let’s assume one of the main drivers of an online SaaS business is online marketing. One of its online marketing tactics is to advertise its product via LinkedIn. The company could define the costs per click using LinkedIn’s advertising tool, estimate the number of website visitors it will attract as a result, the conversion from website visitor to a lead, and the conversion from lead to customer. Based on these metrics the company will have a good idea of potential sales, of course constrained by the budget available for online advertising. Performing a bottom up analysis therefore does not only force you to think about what are realistic targets for your company, but also to think about the ways in which you will spend your resources.” This approach is perfect for companies that are looking for extra guidance in the optimal allocation of their resources.

The Voice, of reason.
Don’t tune out, cash flow forecasting is necessary to build and maintain a strong business.

A cash flow forecast is a tool that businesses use to predict expected future revenue and expenses. As PWC states, “Staying on top of your cash flow will help you see if you’re going to run out of money - and when - so you can prepare ahead of time. Perhaps it will show you that you need to cut overheads, find new investment, or spend time generating sales.”

Aside from strengthening the financial position of the organization, a forecast is a great resource for potential investors. We have all seen those episodes of SharkTank and The Profit where investors ask for capital without a strong understanding of their financials, and shaky reasoning behind their company’s valuation. While it makes for an entertaining episode, you certainly do not want to present that image to your investors. They will want to know how the company is expected to do financially, why the business needs money, and what it will be used for. Make sure you have the analysis to support your answers. Plus, if you are not forecasting, then how are you confident that you are asking for the right amount of money?

Outwit, Outplay, Outlast your competitors.
If you want your business to be a Survivor, you need to understand how to create and implement your own forecast.

The simplest way to enter the world of cash forecasting is to download a free cash flow forecast template online (we have provided one below). Most templates are built in Excel or a similar spreadsheet software. While these templates can provide useful insights, they are time consuming and leave room for human error. If you want to read more about how Excel is limiting your cash forecasting capabilities, click here.

Once you’ve downloaded a template, you will want to compile your data. Depending on your preferred forecasting method this could be anything from a list of company transactions to financial statements.

Once you begin to generate forecasts you will want to continually check them against the actual data and adjust the models as necessary. To increase accuracy, consider adding more transactions or historical data trends into the forecast. It is also important to ensure that you are not forecasting too far out. The further you project, the higher the margin of error.

Cash flow forecasting used to be a lengthy, error prone process. If you are looking to save time and avoid Excel, digital transformation has provided alternatives. While the existing process is not perfect, many are still hesitant to embrace change.

In their blog, Deloitte discusses the fears finance professionals face in the digital age. “People are often scared of the unknown. Even though Finance is a discipline grounded in numbers, some will resist the idea that algorithmic forecasting might enhance their own methods. Help them see that machines can handle the tedious number-crunching work while enabling people to spend more time uncovering valuable insights.”

Stepping into the digital age does not need to be a scary transition. Trovata can improve the efficiency and accuracy of your forecasting process, and allow you to focus on higher level priorities.

The Fear Factor.
At this point you might be in information overload, and feeling a little overwhelmed. Take the first step with Trovata.

Trovata generates a FULLY automated forecast. Machine learning algorithms are leveraged to analyze and integrate historical data trends into the model, improving accuracy and saving time.

Trovata.io is the only modern, big data platform in finance that is built on open-banking APIs. Trovata provides an intuitive and data-rich digital user experience. With Trovata you can have real-time cash visibility and management. No implementation period. No IT.

Deal, or No Deal?
You do not need Howie Mandel to tell you that Trovata is the perfect cash management solution.

Trovata.io directly integrates with banks and allows its users to connect to their banks in minutes. With Trovata, cash positioning is fully automated and users gain access to built-in business intelligence tools to visualize, analyze, report, and reconcile cash flows.

Unlike other providers in the space, Trovata.io can be installed in a minimum of a few hours. Contrary to legacy TMS, Trovata.io offers affordable set-up and maintenance fees.

Trovata provides better cash visibility with an all-in low lift and low-cost solution. We make it easy to quickly answer questions like “How much cash do I have?” and “Where is it going?”.

To start your journey towards digital transformation, visit Trovata.io.

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