Watching the Horizon: Do You Have the Data You Need to Predict Cash Flow?

Pilots don’t fly a plane by staring in the rearview mirror, so why do we rely on backward-looking financial statements to pilot a business?

The COVID-19 pandemic brought into stark focus the critical importance of having real-time, comprehensible, and (most important) actionable data to anticipate cash needs. Businesses with this data at their fingertips were able to not only maximize cash flow by managing expenses but also rethink business offerings to maintain net revenue.

Today’s accounting systems enable near-instant access to financial information — but you only get out what you put in. If you or your bookkeeper are only recording transactions once a month (or even less often), then you will always be playing catch-up, and your financial reports will be nothing more than history lessons received too late.

Clean and organized data is essential for forecasting of any sort. To learn how to maximize both your data and your accounting system, check out our webinar, “It’s a Marathon, Not a Sprint: Going the Distance for Outsourced Accounting Success.”

Get Into a Weekly Accounting Rhythm

Why are we tied to posting activity once a month? In today’s fast-moving business environment, a month is an eternity. We live our lives and run our businesses on a weekly schedule. Shouldn’t our bookkeeping keep the same pace?

By committing to a weekly rhythm of recording transactions, you will have living, breathing data at your fingertips that will let you see the exact state of your business now and predict cash flow weeks in advance.

Here’s an example of what a weekly bookkeeping schedule might look like:

Every day, you or a trusted employee are logging in to check bank account activity and find out what the bank knows that you don’t know. (You can also take advantage of banks’ alert systems to notify you of transactions as soon as they occur.) Be sure to record those transactions that day. Also, deposit any checks that come in during the day, and record ACH customer payments on the day they are received.

This daily maintenance allows a continuous “soft reconciliation” so that when you get to the end of the month, you reconcile the last week of activity and — voila! — you’re done with the month-end close. Not only is this a time-saver, but when the information in your books is “live” (i.e., you’re not waiting on the bank to tell you what your available balance is), you can make decisions faster and with more confidence.

Most other accounting tasks should be performed on a weekly basis. For example:

• Bills are recorded when received and paid on the same day each week.
• Invoices are generated and sent out on the same day each week.
• Credit card activity is downloaded and transactions recorded on the same day each week.
• Payroll tax deposits are scheduled and payroll accounting entries are made on the same day as payroll.

The Golden Ticket: A Two-Week Cash Forecast

Committing to this regular accounting rhythm means that you not only know exactly where your business stands at any moment, but you also have a pretty good idea of where it’s headed. When your books are “live” and cash is updated daily, you can produce an up-to-date cash forecast with a few clicks of the mouse. This should be a simple summary that shows your checking balance, upcoming bills and payroll obligations, anticipated deposits, and other major expenses such as rent. At the bottom of this report, you find the golden ticket to staying on track to your destination — the true balance that you have available to invest.

For a well-capitalized business, we recommend that you look forward two weeks — which typically encompasses one payroll period — and review the forecast on the day before you pay your bills each week. That way, you know exactly how much cash you have available, which allows you to pay those bills in sync with your available cash flow.

See What’s Coming

You don’t have to fly blind. By committing to a weekly accounting rhythm, you can have the data to make important decisions about how to move your business forward — no matter what the winds blow your way. To learn more about how to produce the timely, accurate, accessible information you need to achieve your business goals, check out our webinar or contact your CRI advisor.