Now is the Time to Review Your Cash Forecasting Process

In the current business environment with interest rates on the rise, it is a good time to ensure that your cash forecasting process is optimized. Businesses that have previously relied on cheap, readily-available loans as their backup plan for any cash emergencies may now find that such loans are no longer cheap nor readily available. By focusing on and improving your cash flow forecasts, you can better anticipate any issues that might arise and take steps to mitigate or prevent those issues before they become a problem, and protect your business from one of the main causes of enterprise failure: running out of cash.

Cash forecasting is sometimes seen as a time-consuming process with potentially inaccurate outcomes, but it is critical to the success of any business. You need to know clearly how much is coming in, how much is going out, plus when it is coming in and when it is going out. Forecasts are by their very nature imperfect, but  a well-designed process can reliably alert businesses to any dangers they might face, and there are ways to refine and maintain your own cash forecasts in order to get the most out of them.

Why is effective cash forecasting important?

  1. It helps identify potential cash flow problems weeks or months in advance. This can allow a business to mitigate those potential issues in plenty of time, before they become crises that can spiral out of control. Do you need to have a sale on old inventory? Do you need to raise prices? Do you need to put off a planned investment or upgrade? Do you need to increase your marketing, or decrease it? And if you ultimately need to turn to a line of credit to shore things up, you will have time to look for the best terms rather than accept whatever you can get on a deadline.

  2. It helps maintain your credit rating and access to credit. If you were to experience a cash crunch and have to miss a few payments, you would  likely have made it harder to access credit markets in the future, both for emergencies and for growth.

  3. It helps maintain your reputation with suppliers and other businesses you interact with. When you are seen as a reliable partner, other companies are more likely to do business with you, and to seek you out for future business.

  4. It keeps your employees happy. If employees start to wonder if they’ll get paid on time, they may start to wonder if they should be looking for work elsewhere. 

  5. It allows you to accurately plan for growth. Overreach is a common cause of business failures. When forecasts are overly optimistic  and not grounded in real, accurate cash flow measurements, businesses can expand too far, too fast. When you have a clear idea of what is required just to remain a going concern, then you will know when you have the kind of surplus that can fund future growth.

  6. In addition to helping ensure that you can meet your financial obligations, the detail provided by a quality cash forecasting process can provide an extra window into the overall state and needs of the business, thereby helping management make better overall decisions.

Tips for effective cash forecasting

  1. Account for everything. The more detail you can track, the more accurate your forecast can be. Conversely, without detail, you may understate, overstate, or completely overlook the impact of key cash flow drivers, resulting in unreliable forecasts. This is one of the most important aspects of effective forecasting, but also the most time consuming.

  2. Automate where possible to both speed up the process and reduce human error. There are many effective software solutions available to automate the recordkeeping, entry, and tabulation of your cash inputs and outputs. Automating these processes where suitable for your individual business reduces some of the time demands of the process and limits human errors as well.

  3. Forecast for both the short term and medium term. Daily, weekly, and monthly forecasts are all valuable. Individual business needs will vary, but management will be most effective when it can assess all relevant time horizons.

  4. Your forecast is not fact. It is important to constantly compare your forecast to actual outcomes, preferably on a daily basis. And if you find a significant disconnect between the forecast and outcome, find out why – quickly.

  5. Be consistent. Information-gathering and forecasting shouldn’t be a one-time or haphazard process. Relevant data should be recorded promptly for upcoming forecasts, and a forecasting schedule should be devised and followed.

  6. Get help if you need it. It is not uncommon for first-rate forecasting to require more expertise and experience than a business currently has, so don’t hesitate to seek outside assistance with setting up or improving your tracking and forecasting system – it’s an investment that will pay dividends.


The current economic climate is becoming more challenging, and that means it’s a good time to reassess your cash forecasting methods and cash management processes to ensure that your business doesn’t fall victim to a cash crunch that you could have seen coming.