8 factors to consider when choosing a cash flow forecast solution

Companies with a solid financial footing can grab opportunities that might be out of reach for firms strapped for capital – and it all comes down to cash flow. While cash fuels growth, there is a flip side: too much cash on hand is a sign that your cash flow planning processes need some work.

But you may be asking yourself - how do I know I need a cash flow forecast solution? What features should I look for in a cash flow forecast solution?

What is a cash flow forecast solution?

A cash flow forecast solution is a financial tool that helps businesses predict their future cash inflows and outflows, enabling them to make informed decisions on budgeting, investing, and potential growth.

As your business grows, using spreadsheets to manage finances becomes less efficient and harder to update with the latest data. That's where a cash flow forecast solution comes in by replacing your cumbersome spreadsheets with a more streamlined tool for financial planning.

When evaluating cash flow forecast software, you should prioritize a cloud-based solution that connects your cash flow planning tools with your customer relationship (CRM) and sales management systems. This integration can act as an early warning system, alerting you to activities like a significant contract or a drop in sales that could affect your cash flow.

A key feature of cash flow forecast solutions is dashboards. Dashboards are a visual tool that help everyone in your organization understand the importance of diligent cash flow management. You can include specific metrics that impact your organization's cash flow on personalized dashboards.

By sharing goals, targets, and cash flow projections with the wider organization, a cash flow forecast solution can help change the way your team views cash management.

Cash flow forecast solutions can also be referred to as Corporate Performance Management (CPM) or Financial Performance Management (FPM) software.

Signs you need a cash flow forecast solution

Cash flow planning is crucial for businesses, regardless of whether money is abundant or scarce. Even in profitable times, you might experience cash shortages and surpluses due to inconsistent cash flow planning. This highlights the importance of a cash flow forecast solution.

Every organization has both short- and long-term cash flow needs. Efficient cash management planning calls for matching various funding sources to capital requirements. A well-planned cash flow can reduce short-term borrowing and prevent excess cash from sitting idle in bank accounts.

How can you tell if your cash flow planning is suboptimal, and you need a cash flow forecast solution? Here are some key indicators:

• Having more cash than necessary in multiple non-interest-bearing bank accounts.
• Relying on short-term borrowings to cover operational expenses.
• Inaccurate invoicing.
• Neglecting follow-ups on collections.
• Missing out on vendor discounts or trade spend initiatives.

If there's a significant discrepancy between your cash flow projections and your actual cash flow, it's time to address the issue. When your cash forecast deviates drastically from your actual cash position without any unexpected, short-term event causing it, it's clear that your cash flow plan needs scrutiny.

Inaccurate or insufficient information about your company’s cash position can damage the credibility of your financial leadership. As a CFO, if you can't answer questions about your cash activities—both past and future—you're dealing with a cash flow planning problem.

All the above indicators suggest that your organization might benefit from a cash flow forecast solution, which can optimize your cash management, reduce errors, and improve overall financial performance.

What to look for in a cash flow forecast solution

When evaluating cash flow forecast software vendors, you should ensure the following 8 features and functionality are available:

1. Audit logs
2. Collaboration
3. Model-based data integration
4. Scalability
5. Personnel planning
6. AR and AP
7. Trend analysis and reporting
8. Seasonality

1. Audit logs

Imagine you're meeting with an auditor or an investor. If you explain that you're using a dedicated cash flow forecast solution for all your forecasting and reporting, it will instill confidence in them.

But if everything is based on spreadsheets, they might need more convincing. So, a good cash flow forecast solution doesn’t just make your life easier; it can also improve your relationship with important stakeholders by presenting financial data in a clear and understandable way. The key is finding a solution that’s both simple and accurate.

2. Collaboration

Choosing the right cash flow forecast solution is not just about crunching numbers. It's also about fostering a culture of collaboration within your organization - because it takes more than just accurate modeling to manage cash flow effectively.

This collaboration isn't always straightforward, as not everyone has a firm grasp of core accounting principles. That's where a good cash flow forecast solution comes in.

A cash flow forecast solution should help you explain finance principles, showing each team member how effective cash flow management can contribute to achieving their individual goals and the broader objectives of the business.

3. Model-based data integration

Model-based data integration isn't just about combining data from different sources - it's about digging deep into the details of your financial models.

Think about it this way: cash flow is affected by various factors, from customer receivables to employee costs. A robust cash flow forecast solution allows you to dissect these line items, creating detailed models like an accounts receivable (AR) model or a customer payments model.

A cash flow forecast solution can also analyze historical data to predict future trends - for instance, if a customer typically pays in 42 days, the system can forecast that pattern in the future. Similarly, it can integrate data from your accounts payable (AP), blending open payables with purchase orders based on expected due dates.

Also, consider personnel costs, including benefit payments and overtime trends. Your solution should be able to pull this data from your personnel model. Even capital expenditure (CapEx) timing can be planned out in detail. The key is to find a cash flow forecast solution that can integrate all this data from various detailed models into one comprehensive, accurate forecast. This level of detail can significantly enhance the accuracy of your cash flow predictions.

4. Scalability

When exploring options for a cash flow forecast solution, scalability is critical. The Office of the CFO doesn’t just manage finance data, you help business partners make sense of data to run the business more effectively.

Typically, implementations start with a simple financial model based on your general ledger (GL) data. This model helps generate standard reports like financial and cash flow statements and allows for forecasting and planning. However, the real value in your data often lies in the details behind the GL.

Maybe sales are a key driver in your business, and you need to model that in more detail. Or perhaps personnel costs or freight expenses need more attention. The point is, a scalable solution allows you to start simply, then gradually incorporate more complex elements as your needs change.

Remember, it's not about doing everything at once. Businesses are dynamic, and your cash flow forecast solution should be able to adapt. Keeping a long-term vision in mind, you can periodically reassess your progress and determine the next steps to enhance your financial modeling. This approach ensures that your cash flow forecast solution scales with your business, bringing you closer to your ambitions.

5. Personnel Planning

When we talk about personnel planning, we're referring to understanding each employee's unique attributes or characteristics. These details drive calculations that feed into various costs or income streams for your business.

Think about factors like hire dates, salary bands, and department affiliations. All this data is vital not only in determining the expenses associated with each employee but also in coding this information correctly. In many organizations, this process is often done on a separate Excel sheet or even managed by a team outside of finance.

Let’s consider a scenario - what if you decide to increase an employee's salary? How would that impact the rest of your costs? Even simple changes like this can automatically adjust your earnings and any pre-calculated increases for the budget.

That's where a cash flow forecast solution can shine. Most cash flow forecast solutions have robust capabilities in managing elements like tax caps, benefits lookup rates, and more detailed calculations. This ensures accuracy when reaching the cap for some costs, which could significantly impact your cash flow during budget planning. For instance, if many of your 401k contributions occur early in the year, this will affect your earlier months differently than later ones.

6. Accounts payable & accounts receivables

When evaluating a comprehensive cash flow forecast solution, you should evaluate its capabilities in handling detailed tracking of accounts payable (AP) and accounts receivable (AR). This involves managing specific events like transactions or activities.

Detailed information related to these events can be directly loaded into the system. The real advantage of a robust cash flow forecast solution is its ability to centralize and calculate the impact of these events using associated attributes. These could include amounts, dates, rates, and charges.

For instance, let's say you've loaded all your AP and AR activities exceeding a certain threshold into the system with the aim to understand what events are the most impactful.

Now, imagine if you decide to adjust a schedule or timeframe of an activity. What if you decide to move it earlier? With a single update in a cash flow forecast solution, you can quickly see the impact of this decision. If it appears that you won't be able to cover the cost or meet the deadline, you have the information needed to make strategic decisions.

The ability to manipulate these different levers on a granular level is one of the many features that make a versatile cash flow forecast solution invaluable. After making adjustments, you can easily return to your forecast to see if you're back on track.

7. Trend analysis & reporting

The power of a cash flow forecast solution is its ability to provide detailed insights into specific cash metrics. Whether you're exploring different cash flow strategies or trying to understand your cash position better, trend analysis and reporting capabilities are invaluable.

For instance, it's beneficial to understand certain cash ratios and the effects they have over time. Or maybe you're interested in viewing your data in a trailing twelve months (TTM) format. These are functionalities that should be within reach with a comprehensive cash flow forecast solution, all configurable on an intuitive dashboard. 

8. Seasonality

A cash flow forecast solution should effectively handle seasonality, the predictable changes that recur every calendar year and impact your cash flow. This understanding is important in planning operating expenses and anticipating larger cash events or peak spending periods. Your cash flow forecast solution should allow you to input changes to your budget and leverage existing seasonal trends, allowing for a more accurate month-to-month budget view.

Your cash flow forecast solution should also facilitate granular input of information below the general ledger (GL) level, also known as line-item details. This feature enables a breakdown and justification of different expenses. Empowering different departments to own their data and how they intend to use it, can give the finance team a clearer view of operations and potential cash influx needs. This detailed insight into seasonal trends significantly enhances forecasting accuracy and strategic planning.

Choosing the right cash flow forecast solution for your business

A cash flow forecast solution is an essential tool that enables businesses to plan and manage their financial health more effectively. We discussed the importance of recognizing the signs that your business would benefit from a cash flow forecast solution, such as inconsistent revenues, an inability to grow, and difficulty making payments.

When comparing solutions, remember to focus on features like audit logs, collaboration, model-based data integration, scalability, personnel planning, accounts receivable and payable management, trend analysis and reporting, as well as seasonality. These are the key aspects that will lead to a successful cash flow forecast solution tailored to your unique needs.