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Cash Flow Forecasting in the Face of Uncertainty

by Sarah Teynor - July 2020 7 min read

Cash flow forecasting has never exactly been a walk in the park. But when you add even more moving parts to an already healthy amount of inputs, it can quickly make you feel like you’re stuck on an inflatable dinghy in the middle of a storm. Without a compass. In the dark of night. And that doesn’t bode well for your future.

Unfortunately, without a decent gameplan, that's what cash flow forecasting can become in an ocean of uncertainty. Not only has the COVID-19 crisis placed an even greater emphasis on your working capital needs, it has also made life much more difficult for your financial planning and analysis (FP&A) team. Put another way, it made an already challenging process that much more complicated and demanding – at least if you expect some semblance of accuracy in your forecasts.

Download: 13-Week Cash Flow Forecast Model

For that reason, we're going to look at cash flow forecasting for the new normal, what it means for your financial models, and provide a few key best practices for good measure. Embark wants to make sure you always have the shoreline in sight, especially in these rough seas.

 

Uncertainty Demands Flexibility

Old isn't new again when it comes to the new normal. In fact, in the age of the coronavirus and all of the challenges it presents to companies – evaporating demand, liquidity issues, restructured debt, and many more – your old models and processes might not suit you anymore. Or, more accurately, might not suit you in an environment filled with so much uncertainty.

So that's the first thing to keep in mind when forecasting your cash flow right now – be prepared to veer away from your traditional ways. With so many moving parts, flexibility is at a premium today, tomorrow, and most likely well into the future. That said, as much as you might want to forecast a month or more down the road, uncertainty will most likely severely hamper your accuracy and, therefore, render your forecasts unreliable.

Thinking shorter term will help your FP&A team be more accurate with your forecasting just by reducing the impact of the countless variables currently floating throughout the environment. A tool like our 13-week cash flow template, for instance, could be extremely useful for you these days. Many companies' priorities right now revolve around simply understanding how much cash they have on-hand rather than thinking about longer-term strategic initiatives and massive capital expenditures.

 

Make Your Forecasts Cross-Functional

Expanding on the previous point, your FP&A team probably isn't used to using financial models with so much granularity involved. However, that's where working with treasury could be so useful for your cash flow forecasting. They will have the finer details to flesh-out weekly forecasts – sometimes even daily, if needed. Like it or not, big picture strategy might have to take a temporary backseat to just meeting your cash obligations for now, something that isn't always in FP&A's wheelhouse.

Going forward, such cross-functionality between teams could very well become a pivotal component of your new normal, however you define the term. There's no reason for FP&A to be insular when the data and insights it needs to properly steer your organization forward are already sitting within your company. This isn't the time for your FP&A team to feel as if it needs to reinvent the financial modeling wheel when it already has so much on its plate.

Of course, if treasury isn't looking at cash flow at those granular levels you need to understand your cash position at any given moment, then this is an excellent time for them to start. Treasury needs to make sure they know what a company’s bank account will look like tomorrow morning, and provide those details to the CFO and his or her team. That's the only way to ensure you're meeting your debt obligations, paying your vendors on time, and generally managing your cash in the best possible way, given the circumstances.

 

Improve Your Working Capital Management

Shortening your forecasting cadence and working with other groups within your organization will help improve the accuracy of your forecasts, especially with so much risk sticking around. But those two insights aren't the only things your FP&A team should consider when preparing your cash flow forecasts.

Naturally, improving your working capital management is another integral component of cash flow forecasting in general. So, on that note, let's look at additional insights and tips around accounts receivable (AR), accounts payable (AP), and inventory management to improve your working capital during these challenging times.

 

Examine Your Cash Conversion Cycle

Given the drastic impact of the coronavirus on nearly every aspect of the marketplace, there's a very good chance that your collections and payment cycles have changed in recent months. Therefore, it's critical that you revisit key metrics like your days sales outstanding (DSO), days payable outstanding (DPO), and days inventory outstanding (DIO) to identify ways to leverage your position with customers and vendors to more effectively manage your working capital.

Read Next: Cash Flow Worksheet Template, Basics, & Best Practices

For example, your customers haven't necessarily been impacted by COVID-19 uniformly. What might've been a slight blip on the radar for one could have been a cataclysmic change for another. Therefore, you need to look at the collection cycle for each customer – especially those you've extended collection times for – and identify the best path forward. Determining how long those extended collection times will last is vital to better managing your cash flow.

The same notion holds for your AP, where you need to evaluate vendor relationships individually. Identify who you owe payment to, how often you pay them, and see if a different cadence would work in your favor. Similarly, depending on the nature of your business, you'll want to keep your inventory relatively low to preserve as much cash as possible. Once again, lean and mean operations can drastically enhance flexibility when you need it most.

 

Don't Skip Ahead to Cash Flow Forecasting

Lastly, it's important to remember that your cash flow forecasting doesn't exist in a vacuum. Granted, with so many companies cash-strapped right now and looking for liquidity on any front, it's tempting to skip ahead and narrow your focus on your cash flow.

But patience is a virtue, as they say, so when it comes to your cash flow forecasting, you need to ensure that your other financial forecasts are accurate and reliable. Since your cash flow projections stem directly from your income statement and balance sheet inputs, skipping ahead would be like building a house on top of a suspect foundation.

That said, would you trust such a house to be safe and stable for your family? Hopefully not. But in the same vein, you shouldn't rely on potentially inaccurate inputs to drive your cash flow forecasting. Set your team up for success and avoid getting ahead of yourself. Because that's when bad things happen.

Look, we understand that things aren't very straightforward right now. And as much as we'd like to tell you that everything will bounce back into place and this fog of uncertainty will lift sometime soon, that would be wishful thinking at best.

The truth of the matter is, many aspects of FP&A have most likely permanently changed as a result of this pandemic. However, that's not entirely a bad thing. Sure, downshifting to weekly cash flow forecasts rather than the monthly or annual exercises you might be used to puts a crimp in your long-term strategic planning, at least for the time being. But becoming more flexible and using a collaborative approach to your forecasting is nothing but beneficial, although it might take some time to feel right.

Download: 13-Week Cash Flow Forecast Model

Ultimately, there will come a point in time when your new normal won't have an asterisk next to it. In other words, your new normal will seamlessly blend into your daily operations and become second nature. While you're probably not at that point yet – maybe you can't even see it on the horizon thus far – we assure you that it's not as far away as it might feel. And in the meantime, Embark is here to help your enterprise and FP&A team adjust, adapt, and embrace these admittedly uncertain times. We'll get through this together. Pinky swear.

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