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In today’s episode of ‘From the eLearning Trenches,’ we asked one of our learners, a partner in public practice, to review the way they complete cashflow forecasts on behalf of business clients. What went well? What could be improved?

Learner Reflection

Yes, we have successfully completed cash flow forecasts for clients in the past, employing a methodology that involved working backward from prior year sales figures, incorporating a percentage increase based on product price adjustments. The process aimed to create a realistic projection, considering both competitive pricing and industry benchmarks for gross margin.

Here’s a breakdown of what went well and areas for improvement:

What Went Well:

  1. Realistic Sales Projections: The use of prior year sales plus a percentage increase tied to product price adjustments contributed to a realistic sales projection.
  2. Competitive Pricing Analysis: The incorporation of a competitive pricing analysis, including benchmarking against nearby competitors, ensured that the client’s increased product prices remained competitive in the market.
  3. Detailed Scenario Analysis: Comprehensive scenario analysis, including factors like searching for a cheaper supplier, demonstrated a proactive approach to achieving the targeted ending cash position.

Areas for Improvement:

  1. Worst-Case Scenario Preparation: Introducing a worst-case scenario analysis would enhance the robustness of the cash flow forecast. This involves identifying potential challenges and preparing contingencies for adverse situations.
  2. Sales Factor Assessment: A more in-depth examination of sales factors, such as understanding the reasons customers choose the client’s store, can provide insights. For instance, assessing the impact of external factors like the closure of a nearby supermarket on customer traffic is crucial.
  3. Contingency Planning and Exit Strategy: Developing a formal contingency plan or exit strategy would add a layer of preparedness. This ensures that the business is equipped to navigate unexpected challenges, such as the closure of a significant neighbouring business.

Moving Forward:

  1. Client Collaboration: Strengthen communication with clients to gather insights on external factors influencing their business, ensuring a more holistic understanding of potential risks and opportunities.
  2. Regular Review: Implement a regular review process for cash flow forecasts to promptly adjust projections based on changing circumstances, minimising the impact of unforeseen events.
  3. Education: Educate clients on the importance of a comprehensive worst-case scenario analysis and the necessity of contingency planning, emphasising the proactive nature of such measures in safeguarding the business.

By incorporating these refinements, we aim to enhance the accuracy and resilience of cash flow forecasts, enabling clients to make more informed decisions and navigate potential challenges effectively.

Feedback from our experts

Cashflow forecasting can be an extremely valuable tool for small business owners. The core challenge faced by accountants and advisors is how to develop and manage a cashflow forecast that adds ongoing value within time-cost constraints.

The learner has clearly developed a formal methodology for cashflow forecasting that they use with multiple business clients. They put a lot of effort into providing value and educating clients in relation to exploring different financial and operational scenarios. There’s clearly a cost associated with this, but for established and growing businesses, the benefits can be significant.

For many accounting firms, the first key challenge is getting clients across the line with the service. Fee sensitivity, lack of financial data and poor internal procedures need to be addressed up front. Some solutions are outlined below:

  1. Challenge: Fee Sensitivity

Clients often hesitate to engage in cashflow forecasting due to concerns about additional costs. They may perceive the service as expensive or non-essential.

Solution: To overcome fee sensitivity, accountants can demonstrate the long-term financial benefits of cashflow forecasting. They can use case studies or examples to show how forecasting helps in saving costs, improving financial planning, and avoiding crises. Offering flexible pricing models such as fixed fees for specific services or bundled packages can also make the service more appealing.

  1. Challenge: Lack of Financial Data

Some clients may not have readily available or well-organized financial data, which is crucial for effective cashflow forecasting.

Solution: Accountants can assist clients in setting up systems to collect and organize their financial data more efficiently. This might involve recommending or helping to implement accounting software, training clients on how to maintain proper financial records, or offering regular check-ins to ensure data is being recorded correctly. Educating clients about the importance of accurate financial data in making informed business decisions can also be beneficial.

  1. Challenge: Poor Internal Procedures for Producing Reports

If a client’s internal processes for generating financial reports are inefficient or outdated, it can hinder the effectiveness of cashflow forecasting.

Solution: Accountants can provide consultancy services to help clients revamp their internal reporting procedures. This could involve streamlining processes with automation tools, training staff in best practices for financial reporting, and setting up regular review cycles. Accountants can also offer to take over the report generation process as part of their services, ensuring high-quality, reliable financial reports for forecasting.

Key takeaway: If you’re serious about cashflow forecasting, you should put in place formal systems and processes for getting clients across the line, collecting data and providing relevant reports.

This assessment task and response is taken from the Virtual CFO Advanced eLearning course. Click here to explore this course

Also, take a look at the Virtual CFO Essentials eLearning Course

Discover the pulse of our eLearning community as we unveil daily feedback from enrolled learners. Exciting times ahead as we share this valuable information with the accounting, advisory, and administrative experts in public practice!