Posted by Stephen Hambling on 10/12/18 10:15

balance sheet, P&L, Cash flow forecasts

A set of accounts has three inter dependant controls change one and it impacts another, take an entry on the profit & loss, this will change the balance sheet and with a small delay, the cash flow will move too. You can’t move one without impacting at least one of the others. So it makes sense to me, that when you forecast you can see the impact on all three when change happens. 


Forecasting cashflow

For a business that is growing, the practical constraint on that growth is the ability to fund the business. For almost all business types, as the organisation grows, it will suck in cash. Knowing when that funding is needed, and how much is a key factor in managing the business.

The dynamics of forecasting the funding needs vary a lot

 depending on the business. Some need a large capital expenditure up front before trading can even start. Most manufacturing organisations will recognise this. Setting up a factory with machines and tooling takes time and money. After that, there is a lead time to produce and sell goods, and then a further delay until customers pay their invoices.

Many manufacturing organisations have further complication in their supply chain, with materials or goods being made overseas and being shipped to the end market. Costs and tariffs can be incurred at any point along the chain, with variable lead times in each link in the chain.

Tracking all of the moving parts can get very complicated. Creating an accurate P&L forecast for such a model is fairly straightforward; creating an accurate cash flow is significantly more complex. If you then want to create a “what if” scenario that varies several parameters in the supply chain, then that complexity increases very quickly.

interconnected diagram 

Deferred revenue

 Organisations with deferred revenue face similar complexity, but from a very different direction. With these businesses, making a sale, recognising the revenue, raising invoices and receiving cash can be completely disconnected. Keeping a track of each component across many large contracts with very different profiles is what creates the challenge. In these organisations having an accurate P&L forecast is much less important than the cash profile of each contract.


Checks and balance sheet 

 Of course a consequence of forecasting a cashflow is that most of the balance sheet is also forecast. By ensuring that the balance sheet is balanced, there is an automatic check that nothing has been missed. With so many moving parts in many of these complex forecast, that takes away a lot of risk. Modelling the P&L and cashflow independently means that the two can get out of sync as different iterations and scenarios are considered. Having both joined and balanced in one model, with one set of drivers an assumptions, means that more time is spent considering the results than ensuring that the model is not out of balance. For most finance departments, that time is very precious and is a major reason why they move to a dedicated forecasting platform.


Forecasting tools built for the way you do business


Today’s accounting has evolved from old leather ledgers to modern cloud based systems, which offer enormous power to pull multiple sources of data into one hub. This provides the capability of accessing information faster and analysing more; whilst providing greater security and control than traditional Excel spread sheets. 

However most forecasts aren't integrated. In the case of cash flow, I suspect that a good proportion of you suffer with no real workable solution. Many of our clients have a cash flow built in Excel where the model has been built up over time, with bits added here and there without a balance sheet tied in. Those lucky enough to have a cash flow tied in to the current P&L and balance sheet, and trust the model is accurate and adaptable to changes, are pretty few.


Finance first

 All the finance professionals I work with, like you, would love a forecast model that is fully integrated, why? Well  It’s the only sure way of knowing that everything balances properly; a forecast with proper double entry control and an integrated cash flow.

So when we at Formulate started building forecasting models in Adaptive Insights, we took a long hard look at what finance needed and what the basics were of a great integrated solution. Our conclusion was that every customer needs a direct cash flow statement which is fully integrated with a current P&L and balance sheet to get a full picture.

We built our solution by drawing on our extensive accounting and commercial experience. We also know that without clear visibility of these three accounting pillars of control, exposes the business to a high level of risk; like driving blind – at some point you’ll hit something hard. So take the blinkers off to get a clear view of what lies ahead, and there'll be no going back. 


Take a look at what an integrated forecast looks like in Adaptive Insights:

Watch an Adaptive Demo

Whatever stage you are with looking at an integrated Cash flow forecast from options to purchase, to improving what you have, get in touch and we will be happy to help.

Tags: Blog, Reporting, Adaptive Insights