The corporate landscape throughout the world appears to be in a never-ending state of transformation. Supply chain shortages, major gaps in the workforce, and a never-ending pandemic are impacting each and every industry and contributing to this perpetual state of uncertainty. Is your business set up to handle these dynamic market conditions? Do you have the resources to adapt? How would you prepare the company for the upcoming challenges? Understanding your company's current financial health and assessing the strength of your cash position is crucial. Without it, you won't know if you can make that capital investment or if you have the finances to hire to scale up production. Cash flow forecasting provides you that much-needed knowledge and is the most efficient approach to begin future-proofing your company for the coming year.
A cash flow statement is an important tool that reveals how your business decisions affect cash and cash equivalents – and divides the analysis down into operating, investing, and financing activities. Your ability to produce accurate and timely statements – as well as do analysis based on those up-to-date reports – is crucial for analyzing your organization's current health and making key decisions for the future. And yet, all too often, generating accurate cash flow reports can be problematic.
Analysis can be flawed as the development and analysis of the cash flow statement is almost an afterthought and thus there’s no link between the cash flow analysis and critical business decisions. Or perhaps your integrated cash flow reports are based on GAAP accounting principles rather than formulas, but your existing planning and forecasting software application doesn't support them. Or worse, the detailed insight you need on critical elements of your cash flow analysis isn’t readily available and must instead be manually calculated in a spreadsheet. Whether you're dealing with one of these challenges or all of them, any of them can make it difficult to get a clear image of your company's forecasted cash position.
To ensure your company's success, you'll need sophisticated FP&A systems that prioritize cash. These innovative solutions can provide the insight needed to future-proof your company by ensuring you have synchronized financial data to begin the cash flow forecasting process and can employ what-if analysis with drill-down capabilities.
Cash Flow Forecasting in 2022
Here are five things to keep in mind as you prepare your cash flow forecasting process for 2022:
Ensure financial statement integration. It's impossible to manage your cash flow in a vacuum. By synchronizing important financial statements, such as the income statement, balance sheet, and cash flow statement, you can present a comprehensive view of the core operations, investments, and financing activities that will influence cash flow at any given time.
Perform What-If Analysis. Now more than ever, company’s need to start scenario planning for a wide range of potential business challenges and opportunities. Job number one should be to conduct a what-if analysis for business options that have the potential to affect funding and cash position scenarios. Modern financial planning and analysis software can version all of these distinct situations and provide a fresh set of financial statements for comparative analysis.
Strategic Workforce Planning. Given the current labor shortages in many industries, gaining a better understanding of your company's manpower requirements for 2022 is critical. By integrating strategic workforce planning into the process, you can immediately see the impact of headcount changes to payroll and, most importantly, cash flow.
Capital Asset Planning. There are numerous examples of companies effectively pivoting their operations during the pandemic. Often, it required capital spending to get it done. In the coming year, make sure you can forecast capital asset purchases and depreciation/ amortization on a detailed or aggregate level. With immediate access to a cash flow statement, timely decisions can be made on where spending (or cuts) can occur to achieve the objective – even down to the department level.
Deep drill-down capabilities. When it comes to cash flow forecasting, high-level reporting has its role, but a more comprehensive analysis is required. Make sure you can see the underlying components of cash from operations, investments, and finance by drilling down from a high-level summary cash flow statement. This knowledge gives you a complete picture of the cash flow statement and allows you to make effective predictions.
The one thing financial professionals can bet on for 2022 is that the corporate landscape will remain dynamic. Cash flow forecasting is a powerful tool that can help your company keep up with the market. You will be able to analyze the financial health of your business now and prepare for its future survival, even in the face of ongoing uncertainty, by installing a modern FP&A solution that can manage even the most complicated cash flow requirements.