The Cash Forecasting Procedure
It is impossible to manage cash effectively without an accurate cash forecast. The forecast is designed to give the treasurer insights into the state of cash inflows and outflows over the next few weeks and months. It is critical to have a consistently-applied process for generating a cash forecast, similar to the one shown below.
1. Prepare forecast template. Create a copy of the last cash forecast, and prepare it with the following information:
- Extend the forecast to cover the new forecast period
- Delete from the forecast any dates that are now in the past
- Label the spreadsheet with the forecasting date
- Clear all numbers from the forecast line items
Tip: If you are calculating the cash forecast on an electronic spreadsheet, copy the most recent version of the forecast onto a new tab, and label the tab with the date of the forecast. This allows you to keep a historical record of all prior cash forecasts.
2. Populate the template. Enter the following information into the cash forecast template for each designated time bucket:
- Current cash balance
- The best estimate of cash receipts from open accounts receivable
- The projected cash disbursements for payroll and payroll tax payments
- The projected cash disbursements for accounts payable
- The projected timing of expenditures for capital projects
- The projected timing of dividend payments
- If the cash forecast extends beyond the period covered by the current group of accounts receivable,estimate the cash receipts from new sales that will arrive during the cash forecast period. The timing of these receipts will likely be based on the company’s experience with the timing of cash receipts from the customers to whom sales are expected to be made.
- If the cash forecast extends beyond the period covered by the current group of accounts payable, estimate the cash disbursements related to the cost of goods sold and normal selling and administrative expenses during the relevant cash forecast periods. Another use of cash that may be included in the cash forecast is that portion of an expected acquisition paid for with cash.
Tip: Compile a checklist of all the sources of information for the cash forecast and use it every time a new forecast version is compiled, to ensure that every issue impacting cash is included.
3. Review and revise the forecast. Print an initial copy of the forecast and review it for reasonableness. If any cash inflows or outflows appear to be unusual, confirm them with the person who compiled the information. It may be necessary to avoid funding shortfalls by shifting planned expenditures further into the future, which usually requires a discussion with the controller. This review and revision process can require several iterations.
Tip: A good way to detect flaws in a forecast is to compare the cash flow results for each forecast period to the results predicted for the same periods in the preceding cash forecast, and to investigate any large differences.
4. Adjust for funding changes. If the cash forecast indicates that the company can invest funds or must borrow to meet expenditure requirements, discuss these issues with the treasurer. Incorporate into the forecast any cash withdrawals for new investments or the reduction of loans. Also make note of any loan drawdowns needed to fund forecasted cash requirements.
Control issues: Consider having the treasurer formally approve the final version of the cash forecast, since the treasurer will likely be held accountable if the forecast turns out to be flawed.
Tip: It may be useful to note on the forecast the projected remaining borrowing base against which the company can draw down funds from its line of credit. This is useful for planning when to obtain additional debt.
5. Distribute the forecast. Send copies of the forecast to all parties on the distribution list, such as the controller and chief financial officer.
Control issues: If the cash forecast is distributed by e-mail, consider issuing it as a locked spreadsheet or a PDF document, so the recipients do not make changes to the information. Also, lock down the spreadsheet model so that it is not inadvertently modified within the treasury department.
by Sue Anderson - Based on 30 years of experience in continuing education for accountants. Currently program director for online CPE provider, CPE Link. Formerly with the California CPA Education Foundation managing key operational areas including marketing, program development, and distance learning.