Economic turbulence presents organisations with a range of financial risks and uncertainties. These can extend from fluctuating operational costs to high interest rates, low consumer demand, international instability, and a host of other external factors.
Robust cash flow planning and a strong risk management strategy can increase your company’s resilience and adaptability to shifting circumstances. In this article, we’ll explain why this dual approach is essential for businesses during times of economic uncertainty.
Why Cash Flow Planning Is Essential During Economic Turbulence
As the most important day-to-day measure of an organisation’s financial health, it’s important for all businesses to maintain a clear and accurate view of their cash flow. While it’s easy to focus on profits, it is the availability of liquid cash that often dictates a business’s ability to meet their organisational obligations – including supplier payments, credit repayments and payroll – and to respond to unforeseen circumstances. Economic turbulence frequently impacts the ability of a business to meet its operational needs, meaning that even profitable businesses can find themselves facing cash shortages if they fail to plan effectively.
Effective cash flow management can cushion your organisation against unexpected shocks as well as helping it meet its immediate needs.
Month By Month And Week By Week Cash Flow Forecasting
The best way to manage cash flow is to create detailed month by month and week by week cash flow forecasts. Instead of relying on broad quarterly or annual projections, more regular forecasting gives you greater precision and control during turbulent times. This granular approach is essential in the face of uncertainty for several reasons:
1. Economic shifts can unfold rapidly, so weekly forecasts allow businesses to make small and responsive adjustments, while monthly forecasts give stakeholders more actionable insight into near-term liquidity risk.
2. Breaking down cash flow planning into shorter time windows can highlight potential gaps that a longer overview could miss. This can give you the space to secure short-term finance or renegotiate payment terms, if necessary, in order to cover your obligations.
3. A granular view of cash flow gives you greater clarity about specific risks and periods when your working capital might be insufficient. This is especially useful in sectors that experience seasonal fluctuations, and for businesses with unpredictable revenue cycles.
Automating these monthly and weekly forecasts via platforms like Corporate Planner enables you to consistently monitor and update your projections, using real-time data pulled from your ERP or accounting system. This improves accuracy and reduces the risk of the manual errors and timelag often associated with spreadsheet-based cash flow forecasts.
Integrating Cash Flow With Your Balance Sheets And P&L Statements
For cash flow management to be effective, it must align with data drawn from your balance sheet and P&L for a well-rounded and objective view of your business’s financial health. This is important because the profit and loss statement shows your real-time income and expenses, but doesn’t necessarily reflect when cash enters or leaves your account.
On its own, the P&L isn’t an accurate indicator of cash flow, as sales revenues recorded this month may not be received until the following month or even quarter, impacting your realistic cash flow liquidity. Likewise, your balance sheet gives you a good snapshot of your assets and liabilities at any given time and is useful for monitoring the relationship between accounts payable, accounts receivable, and your cash reserves to help you maintain liquidity and avoid over leveraging.
Used together within an integrated financial planning and analysis platform, your cash flow forecasts join the dots between your profit and loss statement and balance sheet. This helps you sustain profit generation during times of economic turbulence while also ensuring that your organisation has the liquidity needed to operate effectively.
Secure The Future Of Your Business With Modern FP&A Software
Corporate Planner is a world leading financial planning and analysis (FP&A) platform, trusted by businesses of all sizes across the world. Investing in Corporate Planner will give you the ability to generate dynamic and accurate financial reports for a variety of economic scenarios, and to integrate data seamlessly from various sources for more informed decision-making. To discover the benefits in your organisation and how Corporate Planner can help you improve resilience and agility in the face of economic challenges, please contact one of the experienced team at Account-Ability today by clicking here.
