Predicting Cash Flows is more than just looking at a Crystal Ball
Forecasting is the most basic of Econometrics, and this is well-known. However, humans are part of this procedure — playing around with variables and questioning the outcomes. Even though forecasting cash flow is highly methodological, its predictive character allows for a lot of subjectiveness. It is these gaps that are filled with the maker’s intuition and creativity. The human element that is embedded in every step of forecasting can be overlooked by its more complicated as well as mathematical equivalent. This article shines the spotlight on the more subtle aspects of forecasting. The Modern CFO’s intuitive Guide to Forecasting Cash Flows.
Get Creative in Sourcing Information, Become Nosy!
As the CFO, often you’ll make assumptions when you are preparing your forecast. While assumptions are essential for establishing the model, relying solely on them could cause your predictions to be distorted. So, once you’ve come up with your first model put the model aside and turns it into a flier on the wall. Engage with customers, listen in sales meetings, then have an afternoon coffee with your assistant. What surprising information did you discover?
A CFO from a food export business was on the verge of getting the whole thing wrong, had the situation not come up for an accidental moment. When he returned home the driver would talk on and on and on. But, instead of plugging earphones, the CFO continued to listen. The driver expressed relief that the truckers would be able to stay out of traffic and the air told of an indefinite strike by truckers against increasing fuel costs. Confounded by this the CFO knew that this would lead to massive delays in cash flows. Particularly since their inventory was transported by trucks to travel to ports. The conversation fortunately was held just in time for the CFO to modify the forecast in order to accommodate this obstacle. Thus, such synchronicity-based bits of information can be an important factor in determining if a forecast is a great forecast and one that is outstanding. Because these information sources aren’t discovered inside the four interior walls in a carpeted workplace, it is beneficial (quite actually!) to be aware even in the outside world.
Utilize Your Emotions for Strength and play the violin
When you’re faced with repetitive tasks, such as forecasting cash flow it is common place to blindly follow procedures. This could lead to what we would call, in simple terms, a Mid-Life Crisis. The inability to think about and analyze these kinds of tasks could make them obsolete. One CFO was able to escape the stagnation by spending more time with her elderly parents. When she returned for her weekly visits home, the regular food-related arguments exposed the latest cause of contention between the parents. The father was furious at the mother for lending money to housekeepers. The mother justified her actions by claiming that the long-standing connection she had with the aid was sufficient collateral. Although the CFO was able to see numerous flaws in her mother’s arguments, however, the light bulb went off. She recognized that pride and trust played crucial roles in collecting and therefore she decided to use these two qualities. Beginning on Monday the CFO put in efforts to build one-on-one connections with all of her distributors. The payments began to become faster, because now the distributors’ share in the company was not only financial but also a matter of reputation. So, by incorporating emotional information, cash flows were timelier. This in turn reduced the amount of uncertainty when forecasting and helped make it more precise.
Common Sense is often undervalued. Little goes a long Way
Much of forecasting is based on the environment it is trying to forecast, and both have to be considered together. The saying goes that “It is two for a Tango!” The reason for this is not that we would like to convince ourselves that our work is less enjoyable than it really is; however, it is due to the clear relationship between forecasting and its surroundings. Analysts regularly study cultural, economic, and political trends but this connection is only able to be recognized through human experience a.k.a. common sense. Since shocks aren’t always announced their arrival with newspaper letters and so it takes more careful thinking to anticipate the unexpected. The CFO of an FMCG firm looks ahead to 2020. In trying to adapt his company to the possibility of a pandemic that could be imminent it was a simple statement that was able to prevent an unforeseen disruption. A manager’s assistant stated that in situations of stress, people typically stored essentials. If desktop research could not predict the human mind that understood and was frightened could. The CFO had the good fortune of adjusting the forecast of a rise in demand. Looking back, this correction was a huge help in preventing the company from cash shortages that were due to the increased costs for raw materials. If it wasn’t a keen eye to see a pattern that was not that obvious, then the money shortfall could have continued to grow and become a source of other problems like late wage payments.
I hope that this article will have clarified that using forecasting to be an art does not mean we should give up the rigor of our analysis. We are merely saying that forecasting efforts have to be the right mixture of analytics and awareness of the current situation. Even then, the most accurate cash flow forecasts could be a waste of time without the proper payment management software.
In the end, when it comes to forecasting cash flow, even though one can employ the power of digital technology and code to create forecasts, the importance of the human brain is incomparable. You can call it emotion, creativity, or common sense; they are essential elements in business. So, CFOs have to be educated not just in the field of the science of forecasting, but as well as understanding the process of forecasting.