Simply put, efficient and accurate cash flow forecasting allows firms to achieve full control of their budgets and capital structures, and thereby helps those companies both with day to day tactical decisions and to ensure their meet their strategic objectives.

Companies adopt the Prophix Corporate Performance Management software, to address challenges in cash forecasting:
◦ Lack of access to current and accurate data
◦ Poor communication with other departments
◦ Difficulties obtaining data from banks in a timely manner
◦ Insufficient historical data to predict future performance
◦ Absence of variance analysis between forecasted figures and actuals
◦ Forgetting to include tax liabilities
◦ Neglecting seasonal and cyclical trend adjustments
◦ Inability to aggregate data as needed

In today’s uncertain political and economic environment , it is essential to rapidly be able to evaluate to reforecast different ‘what if’ scenarios.

However, there is one item on the balance sheet that can be of major interest—this is cash. As the old saying goes, “Cash is king,” and everyone likes to know that they have enough in the bank to meet the payroll. When a company has debt covenants, other balance sheet items can also be important. For instance, if your bank pulls your loans it can be catastrophic. So planning the balance sheet, at least for finance, is extremely important.

Yet when most companies plan, whether using spreadsheets or Corporate Performance Management (CPM) software, the balance sheet is almost an afterthought. Organizations forecast receivables and payables using simple days of sales or days of payables, and term debt is easily forecast—as is equity and most of the other balance sheet accounts. Finally, to make the balance sheet balance, cash is calculated as a plug.

Using this conventional approach, unfortunately, companies do not obtain a detailed explanation of forecasted changes to cash. For most companies this represents only an intellectual exercise and, for practicalcash management, they produce a separate cash forecast based on what they know about short term cash inflows and outflows. The budget (and/or the monthly rolling forecast) is irrelevant when it comes to forecasting the balance sheet.

To accurately forecast a balance sheet (and hence understand the company’s cash position) more detail is needed than companies have available in an income statement that simply forecasts at the general ledger level of detail. For example, different sales channels will have different payment terms (cash from Internet sales will arrive sooner than receipts from invoiced sales) so separating sales in this way is essential. Seasonality also pays a part since Internet and retail sales may peak before the holiday season. This works similarly with payables. Rent is usually paid immediately while other payables may be based on time-based contractual commitments.

To accurately forecast cash (and hence the balance sheet) companies require information about sales and purchases that may not be readily available to the finance department. To do this properly:
1.Understand your business and analyze which types of sales and purchases affect cash. You don’t necessarily need details of every single forecasted transaction, but forecasts that aggregate common types of transactions will be adequate.
2.Model your business. Make sure that your cash inflows and outflows are based on the different transaction types. Extend this to include functions such as revenue recognition.
3.Find a way to regularly collect information from people outside of finance about the expected values of each type of transaction that you have identified. Get them involved.