Written by Paul Tawel
Companies must accurately estimate revenues and expenses that will be generated by their operations for a period of at least 12 months. These cash flow forecasts of cash flows (or cashflow management) represent one of the most important aspects of sound financial management. Without precise knowledge of future cash requirements, an organization may experience a liquidity crisis likely to have disastrous consequences on its survival. A company that is short of cash and unable to renew or increase its funding will inevitably become insolvent. Therefore, a cash forecast must be perceived first as the “alarm system” to alert the company when funds become insufficient to meet its commitments.
Then the cash forecast should be considered as a strategic tool that allows managers to make the best financial decisions:
- Improve the performance of money market operations.
- Enhance working capital management to avoid cash surpluses/ deficits.
- Perform foreign currency translation when necessary and implement hedging programs instruments to prevent exchange losses.
- Adequately plan long-term financing to prevent the company from issuing debt unnecessarily or suffering cash shortages.
- Assist top management in increasing the company’s value.
- By developing the best and worst case scenarios, measure the impact on cash change commercial, operational and financial that will be introduced by managers over time.
Finally, the cash forecast is also an important monitoring tool to detect monetary problems that may weaken a company. Here are some examples :
- Identify unauthorized debits in bank accounts (fraud) before the accounts are reconciled.
- Identify errors made by the accounts payable department (e.g. non-scheduled cash outflows, unmade tax payments, etc.)
- Measure the company’s performance in generating the money needed to maintain or expand its asset base (periodic evaluation of the “free cash flow”).
The benefits of developing a good cash forecast are too numerous for its implementation to be overlooked. Ultimately, this instrument serves demonstrate the company’s ability to manage its financial affairs appropriately and, when used well, it can be used to significantly increase the level of investor confidence.EFS can help your organization follow these best practices. Start a 30 day free trial today!