3 THINGS TO KNOW ABOUT CASH FLOW MODELLING

With so many accountants turning into advisories these days cash flow modelling is becoming ever more important. It is commonly used by advisors to recommend the best asset allocation for the client, it helps to show the client their current financial position, preferred position and their future forecasts, which in turn helps to set company’s financial goals. Cash flow modelling, in essence, is the process of assessing your current forecasted wealth, your inflows and outflows and create a picture of your finances now and in the future.

While cash flow modelling is important for the business financial planning process, it has some disadvantages. Because it takes assumed rates of growth, income, tax and other expenses to form the basis of the cash flow model, such exercise can become very inaccurate if not taken seriously. Cash flow modelling is a good solution only for those that are willing to put in the effort. So here are some things to improve your cash flow modelling process.

  1. Communication

Most productive way of improving your cash flow model and in order to create a detailed plan of how to deliver the expected financial feature communication is very important. The plan created can only be as good and as comprehensive as data that has been put into the plan.

To make sure that this plan is of the best quality it is crucial to develop a model that facilitates analysis and reporting the way that it happens within the company. Some advanced financial planning and forecasting software programmes, like ProForecast can help with this task, by enabling the user to input the data directly from the accounts exactly as it comes from the accounts. Additionally, it is crucial to develop a driver-based model and assign accountability for those drivers to encourage the right behaviours across the organisation.

Furthermore, it is crucial to create a process within the organisation that not only supports sound cash awareness but also allows for regular communication with the treasury function. This way one can expect the data that is put into this model to be more accurate.

  1. Not a one-off exercise

Another crucial part of cash flow modelling is that it needs to be regularly reviewed in order to increase the accuracy and productivity of such exercise. It is important to keep the history of actuals to ensure that any seasonality or other patterns are understood and updated regularly. Moreover, it is vital to maintain rolling forecasting, updating period opening positions and including as much detail as possible. This helps to maintain not only short-term but also long-term forecasting accuracy.

  1. Share

One thing that forgets the most is the importance of sharing these models. Cash flow modelling is useful within the entirety of the organisation, but unfortunately, it often gets stuck only with the planning and finance departments. Other business units, like sales, marketing and so on, can reap great benefits from receiving regular updates, as well as they can help ensure that the business meets its targets. For example, if such models have picked up on a pattern of activity it can help sales and marketing to focus their attention and recourses to that time period to receive even more benefits from it, or they might do the opposite, they might pull their recourses from that time to help business do better during low periods of activity.

Furthermore, regularly sharing cash forecasts and other performance information with lenders, shareholders and supply chain can help encourage their support in lean times as well as help them prepare for any future fluctuations.