Predictive analytics for your business: Cash-flow forecasting

CEOs set a goal, develop strategies to achieve it and undertake tactical implementation.

How do you know if you can “fund the plan”? How do you know if you have the capital to really “play to win”?

One source of capital to “fund the plan” is your company’s ability to access the private capital markets — a topic we’ve addressed in prior blogs.

A second source requires you to be a visionary and understand how much cash your company will produce that can be reinvested to “fund the plan.” Fortunately, you have a crystal ball at your disposal: Your cash flow forecast.

An effective cash flow forecast ties into your company’s operating plan and budget, telling you what your cash position will be at any point during the projected period (usually 9 – 12 months). Understanding your free cash flow and ability to raise capital will give you a realistic and reasonably precise picture of your total funding capability.

Creating a cash flow forecast requires that you and your team determine the cost of the tactical implementation of your strategic plan. It requires rigorous dialogue where your teammates make and challenge assumptions. The discussions will explore how daily execution ties to the broader strategy. They will involve measures against key performance indicators (KPIs) — past successes and failures, improvements and shortfalls.

The degree to which you and your team understand your business machine will be evident in those assumptions that survive to the final forecast model. An effective cash flow forecast helps to determine your company’s ability to:

• make an acquisition,
• invest in equipment or technology,
• measure team performance,
• guide tax strategy, and
• fulfill hiring needs

With foreknowledge of your cash position, you can present funding requirements to lenders and investors. You can then layer in those actions and financing assumptions as a “scenario” in your cash flow model.

What if your assumptions are incorrect? After finalizing your cash flow projections, you carefully track actual performance to the forecast on a weekly, monthly and quarterly basis. If the cash flow forecast is your crystal ball, the Budget-to-Actuals Report (“Variance Report”) is both your report card and your thermometer. The Variance Report tells you:

• the accuracy of your assumptions,
• how your team has performed vs. KPIs, and
• what tactics/strategies are (or are not) working.

Your Variance Report provides an early warning for where your attention is required, re-allocation of resources and/or a re-prioritization of strategies might be necessary.

The Variance Report creates an irrefutable record which measures the performance of you and your team. If variances are recognized, acknowledged and discussed in a frank manner, you can change course rapidly, creating a culture that is nimble, evolving and dynamic — driven by data and analysis and focused on achieving your goal.

The frequency of the budgeting process varies depending on the nature and volatility of your business and industry, but the review of actual performance versus projections should be ongoing. Problems are often unexpected and you need to find them before they find you.

This post is co-authored by Mark Taffet, CEO, and Wolfgang Tsoutsouris, director, at MAST Advisors, Inc.