Cash Flow Forecasting: better safe than sorry

Projected Cash Flow can be translated with the motto “Better safe than sorry” a favorite expression of the most cautious. The proverb is meant to highlight how it is much better to prevent something bad from happening before we get to the point where it will be necessary to solve something that has already happened. It is a saying that does not represent the Italian way of acting; problems are addressed only after a serious event has already happened, when it is too late.

The Covid-19 emergency and business risk

We are also experiencing this approach in the current pandemic, where, while we could not have prevented a new virus from spreading around the world, we could have limited its contagions. If we had organized in good time the procedures for getting sick people into hospitals, prioritized the development of territorial medical facilities to treat and monitor sick people at home, planned the procurement of personal protective equipment (PPE) and what was needed to swab as many people as possible, the numbers would probably have been lower and perhaps the economic consequences would have been less devastating as well.

In summary planning and control are concepts that should apply to everyone and forever, from individuals to households, which in practice are nothing more than small businesses, to actual businesses. No one, whether in health or business, can afford to make bad choices.

II business risk is always increasing, especially today where companies, in addition to facing the complexity of the market, the resistance of the credit system and the burden of taxation, have to cope with the consequences of Covid-19.

The timely measurement of business strategies

The sailboat is the perfect metaphor for the company:

• Before we leave, we ask ourselves where we are going, how long, by what means and what route to take;
• During the journey we ask ourselves: where are we? Are we staying on course? Are we making it to where we planned? Do we need to change our destination?

It becomes a priority and urgent need to know timely i economic/financial results achieved and especially the forecasts outlining the future direction of corporate finances, regardless of the Business Crisis Code introduced by Legislative Decree No. 14 of 12/01/2019.

Only by measuring the results in a timely manner is it possible to optimize the effects of strategies, otherwise there is a serious risk of focusing efforts and resources on useless activities and, even more seriously, it will be perceived too late.

“Efforts and courage are not enough without a purpose well precise and one direction to follow.” (quoting J. F. Kennedy)

Planning through Cash Flow Forecasting

Planning Must be a continuous process. Financial planning is concerned with flow management, over a time frame of at least 12 months rolling. The main supporting tool in this regard is the  cash flow forecasting which requires:

• Operating revenue, consisting of invoices already due and projected revenues;
• Operating expenses, consisting of supplier invoices already due, forecast purchase costs, personnel costs, and other fixed costs;
• Financial commitments, loan installments and tax installments;
• Any other value that impacts the financial availability (VAT, taxes, …).

The budget process must enable:

• Making “simulations” consequent to management hypotheses and, if valid, turn them into forecasts, at any time;
• Empowering management on the achievement of objectives;
• Coordinate the heads of the various business functions.

Budgeting is a global process that affects the entire company:

• Articulated into subsystems (sales, production, resources, etc.);
• A program that must be translated into monetary terms: economic, financial, and capital budgets.

Therefore, the cash flow forecasting process is only possible through the use of a software solution (not excel) that allows for quick planning and control and, most importantly, ensures the quality of the information.