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New-Age Cash Flow Forecasting Methods for Bookkeepers

3 August 2016

“Everybody has a plan until they get punched in the face.” - Mike Tyson

Have you ever noticed how your budgeted projections don't look anything like your historical numbers? Projections tend to resemble a calm blue ocean however historical numbers look more like a tumultuous pot of troubled energy. The world is a volatile place, especially for small businesses. Despite this, we have a tendency to create smooth forecasts that rarely reflect reality. This is partly why SMEs frequently get blindsided by cash flow problems.

How should the bookkeepers inject a dose of reality into the budget process? For starters, budgets should less about forecasting the future with precision and more focused on creating the right behaviours to ensure strategic goals are met.

It’s better to be vaguely right about future trends than precisely wrong” - John Maynard Keynes

As SMEs operate in an environment of constant change budgets should be adaptive and agile. This requires  a nimble cash management strategy that can access resources on short notice. The problem for many businesses is that by the time they understand the cash requirements to support their strategy (which might be ‘to not run out of cash’) they need it quickly. As such will be forced to pay high rates for it.  In our humble opinion a new cash management strategy is required.

A New Approach to Cash Management  

The short-term plan for many SMEs should be to have enough cash in the bank so they can survive long enough to develop a long-term plan. This is where cash management strategies come into play.

Cash management strategies will not replace the budgeting process. Rather, they are designed to make sure cash flow issues don’t hinder targets set by the budget. For example, if more working capital is required in order to achieve a monthly sales target, the SME might need to reduce the credit terms on sales to some of its customers. This is a delicate process as term of trade can make or break deal conversion however with the right cash management strategy the SME may not need to have those awkward conversations with customers.

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The ability to quickly diagnose cash flow issues and implement a range of cash flow strategies significantly increases the SMEs chances of meeting short-term targets. Cash flow management is a 3 step process;

Step 1 -  Diagnose the problem

SMEs should review their data and ask the following questions

  • How much cash do I need over the next 30 days?
  • What is causing my cash balance to decline?
  • Is it because I am waiting too long for the invoices to get paid?
  • Am I letting too many of my accounts receivables go overdue?
  • Am I paying my suppliers too soon?

Step 2 - Crafting a strategy to manage cash

Now cash flow issues are identified, three key cash flow levers can be used to craft strategies that address the specific cash flow issues. By quantifying and visualising  each strategy, advisors and CFOs can determine the line of least resistance to boosting cash in the bank.  

The three cash flow lever’s:

  1. Invoice collection programs (PULL)
  2. Payment plans for payables (PUSH)
  3. Invoice finance (PULL)

3 key cash flow levers


The use of these levers are often used in the noted order. Pushing out bill payments or pulling in invoice receivables can be executed with good processes and relationship management but in the end all businesses have agreed terms which are the ‘line in the sand’ for payment terms. Well managed collection and payment plans will improve cash flow only so much. The third lever, invoice finance, can be used when bill payment plans and collection strategies fall short of cash flow needs.

Step 3 -  Take Action

Once the cash flow strategy has been crafted to resolve cash flow issues, it must be implemented. Collection strategies can now be largely automated with great apps like Debtor Daddy, ezyCollect, InvoiceSherpa and Chaser.  Invoice finance is also a streamlined service these days. Some invoice finance platforms can arrange funding for qualified businesses in less than 24 hours! These applications give users a degree of control over how strategies are implemented and when they are implemented making cash flow problems are thing of the past.

Stay tuned for more insights as we dig deeper into cash flow management strategies.

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Patrick Crivelli

Written by Patrick Crivelli

Patrick is finance specialist with 10 years experience in fixed income and equity finance. He has worked as a buy-side analyst and portfolio manager in Australia, Hong Kong and UK. Patrick now spends his time solving big problems for small businesses.

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