Stress is knowing that you have a problem and not knowing how to solve it. Real stress is not knowing you have a problem and having to come up with a solution on the fly.
As we approach the next month, focusing on short and medium-term cash and liquidity management will increase in importance. Plotting the inflows and outflows of cash, understanding liquidity and availability, managing short-term needs, and driving medium-term cash management decisions, may require a shift in focus from tracking profits to ensuring there is sufficient liquidity for the company’s operations.
There are a number of routine practices that should be reviewed and, when appropriate, enhanced immediately, they include:
These are great techniques for managing the day to day. However, to provide the vision and tools you will need to manage the your cash flow during turbulent times, cash forecasting, particularly a rolling 13-week cash flow forecast, is an essential and valuable tool.
The primary objective of cash flow forecasting is to assist you with managing liquidity and providing vision as to whether the business has the necessary cash to meet its obligations and avoid funding issues. Proper use of cash forecasting strengthens your decision making process, identifies potential shortfalls and cash needs, and provides you with the opportunity to proactively manage potential issues.
A rolling 13-week forecast provides you with this vision from next week to the end of a quarter. While the most accurate information is this week or next, the rolling forecast allows you to adjust the forecasts underlying assumptions on a weekly basis, creating the ability to adjust real time to evolving business environments.
Forecasting requires a number key elements:
The real value with rolling cash forecast is in using it as a decision-making tool. While forecasting is an inherently imprecise activity, it is extremely useful in identifying trends, understanding the approximate timing of cash needs, and as an analytic tool in evaluating operational changes.
Forecasts do not have to be accurate to be worth the trouble of creating and maintaining them. By elevating the importance of having your management teams discuss the risks they face and consider the resources needed to avoid or mitigate issues or pursue opportunities that might emerge, you will have created a disciplined focus on helping your company develop and execute a plan for situations that may arise.
If you enjoyed this article and would like more information on managing your cash, here's another article you might be interested in, Cash Management and Technologies for the CFO.