Cash flow forecasting is often one of the most crucial tasks in financial planning and can help to ensure a stable business future, but there are some significant disadvantages of cash flow forecasts. Cash flow forecasts can help to set your strategic goals and remove or help prepare for any uncertainties from upcoming projects.
And while financial forecasts are imperative to good business planning and financial stability, it can go wrong. However, with some preventive measures, one can easily overcome these disadvantages of cash flow forecasts.
Good cash flow forecasts are all about good data. The famous saying about $h!t in – $h!t out is there for a reason. Prior to creating your forecast, you have to asses the data you have, it’s accuracy and reliability, and unfortunately, this data cannot always be trusted. If you do fill your forecasts with data that does have some credibility issues your financial forecasts will give you an inaccurate picture of future cash flows. Recruiting, hiring, staffing and scheduling—virtually everything that goes into optimising resources depends on having a good forecast to work of, so it is a problem.
To overcome this, vet your data. Review the health of your data and try to see where its shortcomings are before you use it. This way you can make any necessary adjustments to correct your data or add any additional notes to it. For example, if sales in your last quarter were higher than usual because your sales team has been working on a big contract for a few months, adjust your sales forecasts to account for that.
One of the other disadvantages of cash flow forecasts is that it can be affected by unforeseen factors, such as political turmoil or market change. For example, an unexpected new start-up with solid backing can quickly push you out of your niche, while new government regulation can change everything about cash flow. Additionally, new technology could change your market completely, think cassettes, CD’s and Spotify.
To overcome this cash flow forecasting disadvantage, consider a scenario and what if planning. Such business and market analysis will help you to predict some of the factors, or at least prepare for any market changes that you might expect.
Relying on long-term forecasts
Probably one of the worst disadvantages of cash flow forecasts is business owners blindly relying on long-term based cash flow forecasts and not considering the effect their decisions will have on their business in the future. This is a two-part problem, where the first part is that business owners tend to rely on financial forecasts without review the forecasts, and without running a what-if analysis on that forecast about their decision. This can be overcome by business leaders making informed and researched decisions, together with their forecast, rather than relying on them. For example, if a business was relying only on their forecast that was showing a 10 per cent growth rate annually, and decided to invest into new business expansion, but the sales forecasts fell short, due to a new product appearing on the market, such business would suffer major financial repercussions. But if one had considered the potential impact of such event through scenario planning and risk analysis, the business would have had time to financially prepare for their move and the new product coming into the market.
And the second problem here is that many owners tend to create their forecasts once and don’t review them again. Such forecasts cannot withstand the constant market change and keep their accuracy level.
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