Cash flow forecasting can be stressful in the best of times. There are always growth rate assumptions, unexpected volatilities, months with extra payrolls, and more–making each month’s cash flow different than prior years. If you manage cash for your company, you’re likely always tweaking the forecast in an attempt to get it right, which can be even trickier in today’s economy.
In general, cash flow forecasting is important because you:
- Need cash to pay bills and employees on time (and stay in business).
- Want expenses to hit when you have adequate cash (or appropriate credit).
- May be able to take advantage of periods of time with excess cash to pay down debt or earn more interest on idle funds.
- Need to plan for cash flow negative circumstances.
Due to the global pandemic and major market disruptions, this April doesn’t look like last April, and the year-over-year growth assumptions you were using may no longer hold. So, if you’re trying to forecast your business’s cash flow, you might be wondering: ‘Now what?’
Unfortunately, your old cash flow model (which is now based on outdated business intelligence) may no longer help. Instead, we recommend pulling together sources of information you have access to so you can begin mapping out the next few weeks and months of anticipated receipts and disbursements.
We have guidance to help you get started:
Determine your current available cash balance
Look at your operating account balance minus checks outstanding. Don’t forget to add any unrestricted idle funds you may have invested in liquid money market accounts. Do you have investments that could be sold in the event you needed cash? Do you have CDs or fixed income investments that will be maturing soon? Make sure you have visibility into current account balances and daily transaction activity in online banking, so you can stay up-to-date with reconciliation.
Map out anticipated cash inflows
Previously, you may have looked at each month and compared it to the same month in prior years and applied a growth rate based on economic conditions and anticipated demand. This strategy likely will not work at the moment, so it’s time to look at your outstanding receivables.
It’s important to check in with your sales team and customers to understand when payments are likely to be received. Knowing if payments will be on time, delayed, or only partially paid can help you plan.
Can you speed up inflows?
- Start with your billing process. Has your ability to send out invoices slowed due to a remote workforce? Have you been involved in lengthy back and forth communications with customers questioning the details of invoices? Examine your process and prioritize getting invoices out quickly and accurately.
- Work with customers who are unable to pay invoices to set up payment plans and keep open lines of communication about outstanding invoices.
- Begin accepting electronic payments via Automated Clearing House (ACH), so you don’t have to wait for checks to be mailed and deposited. This will also decrease the risk that checks are returned for insufficient funds.
- Consider accepting customer payments by credit card. You will pay merchant fees to accept card payments, but payments are faster and the credit risk for the customer is transferred to their credit card company (as opposed to your business).
- Deposit checks using Remote Deposit Capture. You can deposit checks conveniently from your office (or your home) with a remote deposit scanner.
Map out anticipated cash outflows
Start by looking at your previous cash flow model for solid information about planned outflows when your business was running at anticipated levels.
It’s important to identify outflows that will not occur or will be significantly reduced. Did your utility utilization rates change? Are travel expenses significantly cut now? Will you no longer be hiring for open roles? Similarly, you may have outflows that were suddenly accelerated or not anticipated in prior forecasts. Perhaps you needed to purchase computer equipment to support a remote workforce.
Review planned outflows with key members of your team and involve them in the new forecast.
Can you slow down outflows?
- Work with venders on payment terms. Will they offer an extension or the opportunity to make partial payments? Is there a point where your relationship with suppliers will be in jeopardy if payments are not made in time? It’s important to be in-the-know so you aren’t surprised, for example, when a supply chain is cut off.
- Stay in touch with your bank. They may be willing to defer loan payments for a period of time, and they can keep you informed about state and federal programs available to enhance credit during this time.
- Paying with a credit or procurement card means that you expand the terms of payments. If you go beyond the credit card due date, you will pay interest. But if you pay with a credit card, you will likely get your bill 30 days later. Review terms and conditions for your credit or procurement card programs. Remember, credit card terms, such as payment dates, can often be negotiated.
- Remind employees to stay on top of reimbursement requests, so you aren’t surprised by unanticipated expenses.
Relationships are vital to cash flow forecasting
At this time, it’s key to work with what you know and make adjustments as you go. Throughout your process, you’re likely focused on the numbers, but it’s important not to lose sight of your human capital as well. Stay in touch with your team, your customers, your vendors, and your bank. The information and resources they can provide are vital to your business’s financial health.
By Barbara Raths, Treasury Management Sales Advisor, Camden National Bank