Finance executives and professionals must rely on purpose-designed planning, budgeting and analysis software solutions that will deliver complete and accurate forecasted financial statements for all budgeted period. Use of spreadsheets or pure guessing of anticipated future results can never deliver this level of completeness and accuracy and any cash flow projections done in this manner will be a gross estimate that should not be relied on.

How is Cash Flow Affected When Your Company Records Revenue and Expenses?

Most companies use the accrual method of accounting. This means that all revenue is recorded in the period it was earned and all expenses are recorded in the period they were incurred. Both activities, however, do not usually coincide with cash receipts and cash disbursements due to varying payment terms extended to customers and received from suppliers. These can be 30, 60 or even 90 days and each customer or supplier may have different payment terms. This makes cash flow projections very difficult and actually impossible to implement. Use of spreadsheets for cash flow projections will typically produce results that are grossly inaccurate. The solution is to employ a planning and budgeting software application that has all the business logic built in where all payments and cash receipts are automatically applied in the correct budget periods. This will help generate a much more complete picture of all future cash receipts and cash disbursements.  The generated forecasted Balance Sheet and Statement of Cash Flows will allow finance executives and professional to evaluate future cash requirements or cash surplus.

The Importance of Cash Flow for Project-Centric Businesses

Cash flow management is one of the most important determinants of the success of project management. Cash flow problems can be caused by a number of factors and many of them are not related to project profitability. Examples include: labor intensive work; payments to subcontractors or supplies before payment is received from the customer; retainage and slow payers (i.e. government contracts). Failure to plan and control cash flow can lead to higher interest expense, owner’s needing to increase their investment; weaken credit rating; an inability to take advantage of new opportunities and perhaps even failure of the business.

Formulas, Functions and Links

Formulas, functions, links and other user programming done in a spreadsheet environment often results in undetected errors, broken links and other programming issues that can have an adverse effect on the integrity and accuracy of the work performed. Maintaining large and complex spreadsheet files used in corporate planning, budgeting, and especially scaling the models is often an exercise in futility. Cash flow forecasts that rely on these spreadsheets are usually unreliable, grossly inaccurate and can seriously mislead management into making wrong tactical and operational decisions.

Forecast as an Extension of Actual Period Accounting

Similar to financial statements of past accounting periods, a properly prepared plan and budget should  also include a Balance Sheet and a Statement of Cash Flows, in additional to the commonly seen forecasted Income Statement. Using a software solution (either In the Cloud or On Premises) that was specifically designed to be an extension of an organization’s actual accounting system will allow company managements to gain visibility into their organizations’ future financial health.

Don’t guess with spreadsheets. Join Polaris Business Solutions and Budget Maestro for a free webinar, on Wednesday, April 13th at 11 AM EST,  on how to move beyond Excel and cut the time to budget and forecast in half. Hope you can join us!

Budget Maestro contributed to this posting.  Budget Maestro is the ideal solution for the small to medium sized business ready to transition off spreadsheets to an automated budgeting, forecasting and reporting process.