Inflation and interest rate rises are a subject of concern for all businesses and require careful cash
flow forecasting in order to navigate issues in the market and supply chain. Accurate forecasting is
made more difficult by the current political instability, and no one being sure how high interest rates will rise over the coming 12 months.
What are the most important factors to consider when creating a cash flow forecast in the current
uncertain business environment?
1) External Factors
The post-Covid business landscape has a wide variety of operational risk factors for businesses that must be accounted for within cash flow forecasts, for example:
- High inflation and cost of living rises leading to wage pressure on businesses from employees – at a time when many businesses are struggling to fill skilled positions.
- Supply chain disruption instigated by the pandemic and the Ukraine war causing a scarcity of certain raw materials and subsequent rises in costs.
- Large utility cost rises impacting operational overheads for most businesses.
- Bank borrowing costs rising with increased interest rates, making it more difficult for businesses to plan investments.
- Market resistance from consumers to paying increased costs, leading to pressure on margins in many sectors and the requirement for innovative approaches to efficiency and productivity improvements.
2) Responsive Cash Flow Forecasting
With market conditions subject to rapid change, your cash flow forecasting model must be
responsive enough to accommodate real-time data and up-to-date data and variables, and make it easy to run new forecasts when situations change. The model should be adaptable to a variety of business circumstances and scenarios, with a set of clear underlying assumptions that can be quickly edited and adjusted as required.
3) Scenario Building
The more scenarios that can be modelled by a forecasting strategy, the more accurate each forecast will be. In a turbulent environment, single-scenario forecasts can quickly lose relevance and accuracy. Using a dedicated financial planning application will allow you to model forecasts based on a drop in sales, a rise in interest rates, high utility bills, etc, and allow you to plan accurately and effectively to achieve growth under any combination of challenging circumstances.
Scenarios let you stress test your business and improve its resilience in a virtual environment, and
ensure that you and your board know what steps your company needs to take if the unexpected
happens – before cash flow becomes critical.
How To Create An Effective And Accurate Cash Flow Forecast
Many businesses use Microsoft Excel to create cash flow forecasts, often utilising multiple
spreadsheets. This is a convenient channel for consolidating data from multiple sources and sharing reports and forecasts in a format that is widely understood, and that does not require expert knowledge.
For small businesses, a spreadsheet approach may be perfectly adequate. However, as a business grows in size and complexity, Excel spreadsheets may not be adequate for creating multilevel forecasts using multiple scenarios, with integrated data from a variety of sources. Excel forecasts are slow and cumbersome to change, prone to errors and duplications, make collaboration difficult (especially among remote teams), and are very difficult to integrate with non-Microsoft platforms.
An integrated financial planning and forecasting platform, such as Corporate Planner, can generate forecasts to a higher degree of accuracy than manual and Excel-based forecasts, by incorporating a wider range of datasets and variance scenarios – while using less time and resources. Dedicated forecasting software can overcome the inherent problems of using spreadsheets and/or manual calculations, through direct integration with your accounting system, access to a single source of truth, multiple scenario modelling, and multiple-user collaboration.
How Account-Ability Can Help
Inflation and interest rates are largely outside the control of individual businesses. However,
companies of all sizes can utilise cash flow forecasting software to navigate economic uncertainty
and make intelligent decisions using their resources to their best potential in any circumstances.
This integrated approach to financial planning and forecasting software gives businesses more resilience and adaptability to change, allowing them to thrive in any economic environment. To find out more about how Account Ability can help, please call 01242 578966 today.
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