5 ways to decrease the time spent on cash flow forecasting by 50%

For finance leaders, managing cash flow is a strategic imperative. It shows how much cash is being generated by the business, and how a company’s expenses are funded.

Thus, ensuring a positive cash flow and sufficient working capital is critical for your business to thrive in the long run.

To do that, having your key metrics such as runway, burn rate, DSO, DPO, etc. always up to date so you can make proactive decisions to identify trends, streamline cash flow, and adjust growth plans is essential! This requires having the right tools and processes in place to improve your cash flow and forecasting accuracy.

What is cash flow forecasting?

Cash flow forecasting is a tool to measure a company’s liquidity that ensures it has enough cash to meet its immediate obligations and plan for future financial needs. You need to consider all cash inflows and outflows from investing activities, operating activities, and financing activities to come up with accurate projections in the short- and long-term.

Why is cash flow forecasting important?

Cash is the lifeblood of every business—and I reiterate—it’s more important valuations or revenue growth. Thus, coming up with accurate cash flow forecasts is essential to make changes to your business strategy and operating plans to help extend your runway, ensure a healthy cash position, and even determine the right time to raise a new funding round.

Cash flow forecasting empowers businesses to proactively manage their finances by anticipating future cash inflows and outflows. It helps companies:

1. Ensure Liquidity: Maintain enough cash to cover daily operations without the need to secure external funding.
2. Make Informed Decisions: Provide a basis for making strategic decisions such as hiring, R&D investments, and market expansion.
3. Manage Risk: Identify potential shortfalls and financial risks before they become crises.

Types of cash flow forecasting

There are primarily two methods of cash flow forecasting: direct and indirect. Each method has its use and businesses choose one based on their needs and the level of detail required.

SaaS businesses typically rely on the indirect method. This is because this method offers a straightforward and more streamlined approach since it starts with the net income, linking directly to the P&L statement, and then incorporating adjustments from the balance sheet.

With this method, it is also easier to align and provide visibility to key stakeholders such as board members and investors. They are not interested in scrutinizing line items of a company’s cash flow statements but in getting an understanding of the company’s financial health, and the indirect method provides this information.

Why is the indirect method of cash flow forecasting so hard?

Making sense of your cash flow statement and making decisions on top of that is generally hard because it requires you to:

1. Gather data from multiple systems such as ERP, CRM, Billing, HRIS, etc.
2. Rely on spreadsheets for data manipulation which is tedious, time-consuming, and error-prone
3. Repetitive — reducing it to a monthly tactical activity rather than a forward-looking value-adding strategic analytical task

This prevents you and the management from understanding and optimizing your cash flow to make quick strategic decisions that can positively influence your business growth.

5 Tips to improve your cash flow forecasting

Data analytics paired with scenario planning empowers finance leaders to go beyond mere numbers, allowing them to craft a clear and impactful narrative guiding the company toward a successful future.

1. Automate data collection: Instead of pulling data manually from various business applications, automating the process of data collection will not only save days of your time but also eliminate manual errors.
2. Standardize processes: Define template, formulas and data update frequency, and set rules around how data is to be collected, analyzed, and reported.
3. Use rolling forecasts: This approach will ensure that you don’t have to start from scratch each time and you can easily extend the previous period by adding a new one.
4. Leverage artificial intelligence (AI): Use AI to quickly analyze historical data and predict future trends.
5. Continuous Improvement: Leverage insights from past forecasts to refine and improve your methods.

In case you are looking for a template, especially if you are an FP&A leader for a SaaS company, this cash flow projection Excel template is very reliable and makes it fast and easy to get a granular view of how money moves in your business.

Using purpose-built FP&A software for cash flow forecasting

A purpose-built FP&A tool can eliminate several of the pain points I discussed earlier. It’ll not only reduce the amount of time spent on forecasting but also improve the accuracy of your forecasts.

I recently saw Drivetrain , a strategic finance platform, in action and, here is what stood out for me:

1. Native integrations: it easily pulls and marries the data from all your business applications—quite notably it supports a wide variety of systems regardless of the data complexity. This is a key criterion to look out for in FP&A tools so they can provide real-time visibility over all your key metrics.
2. Extremely simple to use: built for seamless collaboration with models and formulas written in plain-English. Even non-finance folks would feel comfortable using the platform and can easily build custom reports.
3. Flexible multidimensional modeling: Offers a lot of flexibility to build your models your way, without forcing you to model through their templates only.

The bottom line for finance leaders, advanced cash flow forecasting isn't just a checkbox exercise - it's a game-changer. By proactively managing the financial runway, you can make strategic decisions with confidence and stay ahead of the curve. As we continue to navigate through uncertain times, being prepared with effective financial forecasting can be the difference between merely surviving and thriving.