As a chief financial officer focused on cash flow, working with clients over two decades who are doing annual revenue ranging from £40k to £53.8m across various industries, in this actionable guide, I will share with you the limitations of cash flow forecasting.
First, I will share the cash flow forecasting limitations. Then, I will share how you can implement strategies to overcome them.
I will also share expert discussion quotes from fellow cash flow experts so you can get a balanced view on this topic.
Why Trust My Expertise in Cash Flow?
I’m a leading cash flow specialist based in the UK who has helped hundreds of clients improve their financial health. My insights have been featured in major publications like Agicap, QuickBooks Online, Independent, Zoho, and Floatapp. I also run my own consulting company, Hungry Cash Flow Ltd., dedicated to helping businesses like yours thrive through better cash flow management and optimization.
Don’t worry; you are in safe hands.
By the end of this article, you’ll be fully aware of five limitations of cash flow forecasting and how you can address them, so that you can build cash flow forecasts to have accurate future cash flow visibility.
Key Takeaways
- Cash flow forecasting is essential but inherently uncertain.
- Accurate forecasting requires data from various sources, collaboration across departments, and consistent effort.
- Proactive and adaptive strategies can mitigate forecasting challenges.
- External factors like economic volatility and regulatory changes can significantly impact cash flow.
- Seeking professional guidance can help navigate the complexities of cash flow forecasting.
What Are the Limitations Of Cash Flow Forecasting?
Cash flow forecasting limitations are the inherent challenges, potential inaccuracies, and uncertainties involved in forecasting future cash inflows and outflows, often leading to a higher variance between a cash flow forecast and a cash flow statement.
These limitations arise from future events that are beyond the control of those doing the forecasting, reliance on historical assumptions that may have information gaps, and the lack of real-time, accurate data. As a result, the accuracy of cash flow forecasts is compromised, which in turn affects decision-making, particularly when it comes to ensuring sufficient working capital for day-to-day operations and maintaining financial stability.
Now that you are fully aware of the limitations of cash flow forecasting, let me share with you five limitations I often see when I help my clients build an accurate cash flow forecast.
5 Key Limitations of Cash Flow Forecasting
1. Multi-Source Data Gathering: A Complex Task for Effective Cash Management
From my experience working with clients over the years, I’ve learned that the accuracy of a cash flow forecast depends on accurate and timely data. In reality, obtaining real-time data from different sources is very challenging.
For example, one of my clients in the energy service provider sector adopted a 13-week cash flow forecasting model, relying on input from both the sales and procurement teams. However, when deals were canceled or postponed, these commercial decisions weren’t always promptly reflected in the forecast figures. This led to a significant difference between the forecasted cash balance and the actual cash flow balance at the end of the forecast period.
Consequently, this business faced difficulties meeting payroll obligations and covering VAT payments at the end of the month. This situation clearly demonstrates the critical importance of timely and accurate data collection for effective cash flow management.
2. Siloed Departments: The Need for Unified Thinking in Financial Statement Preparation
Do you feel your business operations are running in silos? If yes, you’re not alone. From what I’ve seen working with my clients over the years, most businesses doing seven figures and beyond have multiple departments, such as marketing and finance.
The problem is, most departments are siloed. I call this lack of collaboration “There’s no joined-up thinking.”
This means, for example, the marketing department might not know the current cash position. They run marketing campaigns without realizing that they don’t have enough cash to execute them properly.
And vice versa. The business may have excess cash to reinvest, but the marketing team isn’t aware of the calculated risks they can take.
It reminds me of my clients—a retailer selling pre-owned bags. They decided to participate in a business show in the quarter when they had to pay massive VAT and corporation tax bills. Participating in the exhibition consumed a significant amount of cash, leaving the business owner frantically calling the bank for an extension and increase of their overdraft facility.
The point here is that if they had forecasted the VAT and corporation tax payments, including the incremental cash outflow to participate in the fair, then the business owner would have made informed decisions and been better prepared.
I don’t want you to go through this pain.
3. Accurate Bookkeeping and Bank Reconciliation: The Foundation of Forecasting
There’s a saying in our accounting and finance world: “Garbage in, garbage out.” In the context of cash flow forecasting, this means your forecast is only as accurate as the bookkeeping and bank reconciliation behind it. Unfortunately, this is not always the case.
From my twenty-plus years as a chartered certified accountant turned cash flow specialist, mainly working as a CFO, I find that on average, between 20% and 30% of bookkeeping record-keeping is wrong. Either transactions are misallocated to the wrong nominal accounts or there isn’t consistency in allocating a particular vendor or customer to the same nominal account.
As a result, the data used for forecasting is inaccurate from the start. This means that the resulting forecast may be unreliable and misleading.
Sounds familiar?
4. Regular Discipline: Consistency is Key for Tracking Cash Flow
One of the biggest mistakes I see clients make when getting a grip on their cash flow is a lack of financial discipline. I call it “Entrepreneur’s Financial Discipline Syndrome” (EFDS) for short.
From what I have seen, they only start looking at cash flow when running out of cash. There’s no habit of regularly preparing cash flow statements and forecasts. It’s a bit like using toothpaste. When you have plenty, you don’t care about the toothpaste. When you start to run out, you squeeze the life out of it.
Just like poor brushing habits lead to dental problems, poor cash flow habits eventually lead to cash flow issues.
Which I believe you would surely want to avoid, right?
5. Capacity Constraints: Skills and Resources Matter in Financial Management
I get it. You’re trying to grow your business. Until you hit that seven-figure mark, you must be more than just a business owner. You’re your own:
- CFO (Chief Financial Officer)
- CMO (Chief Marketing Officer)
- COO (Chief Operating Officer)
It’s hard to keep up with all the tasks, especially complex ones like cash flow forecasting. On top of that, you may not have the resources or the skills to hire a cash flow specialist.
Either way, there is a gap between the need for strong financial management in your business and your resources or expertise. This gap can lead to errors, delays, and missed opportunities, further undermining the accuracy of your cash flow forecasts.
From what I have seen working with my clients over the years, many small business owners struggle with these capacity constraints.
Does this resonate with you? If so, you’re not alone.
Real-World Examples: Cash Flow Forecasting Pitfalls Across the Business Lifecycle
I don’t know what stage of business you are in. What I do know is, cash flow limitations affect all stages of business. Let me share with you some examples of my clients. I have changed the name and location to protect their identities.
Startup Stage: Optimism vs. Reality
Two tech-savvy brothers embarked on a venture to build SEO software to help websites rank higher on Google. They successfully secured their first round of funding from investors, presenting a very optimistic cash flow forecast.
However, the reality of competing against giants like Ahrefs, Semrush, Ubersuggest, and Moz proved harsher than anticipated. The battle for market share was fierce, forcing them to spend more on customer acquisition than their forecast accounted for. This unexpected cash drain wasn’t reflected in their best-case, worst-case, or most likely scenarios. As a result, the business was forced to seek Series B funding much sooner than expected, highlighting the importance of considering competitive pressures and realistic customer acquisition costs when forecasting.
Growing Stage: Changing Consumer Habits and Supply Chain Challenges
If you are a growing business, I can understand the frustration of trying to forecast cash flow as accurately as possible. One of my clients, a retailer selling luxury sofas, projected a 15% increase in sales for the next year based on the last six months of data.
However, changes in customer buying habits after the Covid-19 pandemic and Brexit, combined with supply chain issues from Spain and Italy for their made-to-order sofas, created significant problems. They had to issue numerous refunds due to late deliveries, creating an unforeseen cash outflow not accounted for in their forecast. This demonstrates the importance of considering external factors and changing market dynamics when forecasting cash flow, especially during periods of growth.
Mature Stage: Underestimating Rising Costs
One of my clients, who has been running a family café in Margaret for over 40 years, relied heavily on historical financial data to purchase ingredients for their popular breakfasts. He failed to take into account rising energy prices and inflation, which resulted in higher sales costs, eroding his profit margin and thus directly impacting cash flow. This highlights the importance of continuously monitoring and adjusting forecasts, even for established businesses, to reflect current economic conditions.
Expert Insights on Cash Flow Forecasting Limitations
I was curious to hear what other cash flow experts had to say on the topic of cash flow forecast limitations. Here’s what they shared:
Ananda Sharma, FCCA – Ashley Richmond, London, UK
“Cash flow forecasting, as a standalone concept, doesn’t provide the overall picture of a company’s cash flow position. It needs to be integrated with accurate cash flow statements prepared in a timely manner. From what I’ve seen, setting up a routine for this task is a challenge for businesses, as it requires time, effort, and real-time data.”
Roshan Giri, FCCA – Globe Accountancy Services, London, UK
“Building multiple scenarios (best-case, worst-case, most likely) using historical data as a starting point is key. Quite often, data needed to create a meaningful cash flow forecast lacks input from multiple sources, leading to inaccuracies.”
Their comments reinforce the limitations of cash flow forecasting discussed in this article.
Your Next Steps: Conquering Cash Flow Limitations
Now that you understand the hidden pitfalls of cash flow forecasting, it’s time to take action and protect your business from financial surprises. As a cash flow expert with over two decades of experience, I understand the challenges you face. Here are two options to improve your cash flow forecasting:
Option 1: Empower Yourself
Dive into my comprehensive guide on proven strategies to overcome cash flow limitations and build a more accurate forecast for your business. This guide will teach you how to identify potential cash flow problems before they arise, make informed financial decisions, and confidently navigate the unpredictable business landscape. Click here to access the guide and start building a more accurate and reliable cash flow forecast today.
Option 2: Partner with an Expert
If you’re looking for a faster track to success, you can partner with me and my team at Hungry Cash Flow Ltd. We offer expert cash flow forecasting services tailored to your specific sector, business size, and current situation.
Book a free, no-obligation 30-minute consultation today to discuss how we can help you achieve your cash flow targets. check it out here
