Trends vs Accuracy when Forecasting

Why they Matter More when Cash Flow Forecasting for your Clients

As accountants, you are always looking for ways to make your job easier and more accurate. However, trends are one of the most important metrics that you should be monitoring when it comes to forecasting cash flow. The reason is simple: accuracy isn't as important as having a good idea about what's happening in the future! This article will go into detail on why trends matter so much more than precision for accountants and their clients' cash flow forecasts.

Your clients have a lot on their plate. From dealing with suppliers to meeting deadlines, shipping products, or working tirelessly on business development, there is more than enough to draw their time and attention away from keeping an eye on their cash flow forecast.

This is a massive opportunity for you. Step up, provide a solution they’ve never thought of and become a reliable source of trusted information.

Your time is at a premium too, but being able to guide your client on matters of the cash flow will elevate you above your own competition, and make you an integral cog in the machine that is your client’s business in the process.

How accurate should your cash flow be?

In short, complete accuracy is not required when it comes to KPI reporting, scenario planning, and even a cash flow forecast. It goes without saying that accuracy is the ultimate goal for all accountants, but achieving said accuracy often requires a level of detail that isn’t always forthcoming from your clients.

The best accountants are able to identify trends and make informed predictions based on those trends. This is especially important when it comes to cash flow forecasting because the future will always be in flux regardless of how accurate your forecast may or may not be at any given point in time. In short, accuracy should never trump trend forecasting when it comes to cash flow.

So long as the numbers you are using are based on reality, you can complete a picture of the health of the business, even if you’ve had to color outside the lines a little. What you’re doing is starting the conversation and providing them with something they can base decisions on. What’s the point in making outdated decisions on accurate information?

Which trends should small businesses report on?

When you are reporting cash flow forecasts to your client, what they are really looking for is your professional insight and guidance – not just a collection of figures with little ­to ­no explanation. The important factor here is the plural: you might have many forecasts representing a best or worst case.

Your client may need a forecast showcasing the results if they make an acquisition, and another displaying the results if they do not. The options are endless.

The important part is that you and your client are addressing outcomes and planning for them, combining your expertise and theirs in a forecast based on real data.

It is therefore important to know which trends to highlight and communicate in order to add value to their business and help them avoid any nasty cash ­related surprises further down the line.

In general, it is beneficial to report on the following trends:

• Inventory
• Accounts Receivable (AR) and Accounts Payable (AP)
• Cash on Hand
• Deposits in Transit
• Customer Unpaid Invoices and Notes Receivable

Spotting cash flow shortfalls for your clients

When you’re assessing the cash flow forecast for your client, it is important to consider not just accuracy but also trends. Where are they going? What do these things mean for their future prospects? Analysts will often use a rolling 12-month period to track trends over time, which can be more illuminating than looking at monthly figures.

A hugely important trend is identifying a shortfall in cash early enough to do something about it. This can be the difference between the life and death of a business. By providing your client with this information before it’s too late, they have time to seek an alternative means of income, such as extending an overdraft or chasing up overdue invoices.

Managing debtors

Speaking of overdue invoices, with everything else going on, it is all too easy for your client to overlook issues with debtors. Spotting trends regarding particular debtors will allow you to advise your client to toughen up and seek payment as agreed in their terms of business.

Invest in a software system that can integrate with your accounting package (Futrli Flow, for example), and then use it to create alerts for trends in debtors. You want the client's account executive (or their office manager) to receive regular updates on overdue invoices so they are aware of where there might be problems. Record any late payments or nonpayment and factor these in the future. Research techniques for dealing with these situations.

Assessing accounts payable policies

Is your client jeopardizing the business by being too lenient with their credit terms, or by paying their suppliers too quickly? Identifying such trends will help your client understand when to stick or twist with regard to available cash.

These trends can also assist in predicting cash-flow problems. Say you have noticed that your client's accounts payable balance is increasing steadily every month, while their available cash is decreasing. This trend might be caused by a number of reasons - such as supplier invoices not being paid on time or delays in the production process causing an accumulation of money owed.

Planning capital expenditure

Another pitfall to be avoided by picking up on cash flow trends is capital expenditure. Advising your client of the best times to buy new fixed assets will help them circumvent the unwanted scenario of needing a piece of equipment, and not having the surplus cash to pull the trigger on the purchase.

Forecasting capital expenditure is important because it helps your clients avoid losing money when they need equipment or upgrading something but don't have the surplus funds available.

New accounting softwares have a cash flow forecasting module that can help you identify trends in your client's account balances and any other numbers that might be relevant to their forecast.

The logical next step

Delivering a quick and clean insight into your client’s cash flow trends provides them the data they need to make smart, informed decisions regarding the health and performance of their business, long before they come unstuck due to cash shortfalls or unfavorable payment terms.

Futrli creates forecasts in seconds. Produce an entire forecast based on last year’s actuals or some what-if assumptions and start talking to your client about their future, not just the past.

Once the conversation has started, you have the opportunity to share advice in a more focused manner. It is at this point that you can begin to put a plan in place to review a variety of different outcomes, as well as build the master forecast.

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