How often should we review the cash flow forecast?

We have built the cash flow forecast for our company. How often should we review and update it?

The best practice would be doing the reviews at least once a week. However, if the company has considerable cash reserves, less frequent reviews are also acceptable.

To begin with, let’s answer another question.

Why do we do cash flow forecasting at all?

We do it to make sure if we are likely to have enough cash in our bank accounts for the foreseeable period so that we can make all necessary payments (salaries, supplier invoices, taxes, loan repayments, dividends – anything) on time.

If the forecast suggests we are likely to have a cash shortage, we want to find out about it as soon as possible. So that we have enough time to do something that will help avoid it.

How can we avoid a potential cash shortage?

We may want to explore different options. From accelerating project delivery to renegotiating payment terms with some of our clients to reducing or postponing some of the costs or investments. Or taking out a working capital loan. Or maybe raising new investment.

What all of these options have in common is that they all require quite a bit of time before we will see a positive impact on the cash flow. In most cases we are talking about several months.

Assumptions keep changing all the time

The assumptions that impact the cash flow keep changing all the time, irrespective of whether we update our forecast. We win new projects with some of our clients. Some other projects get delayed. We decide to hire additional employees or invest into new products.

All of it impacts the cash flow. So why delay the moment when we will understand the impact? Especially so if our company does not have huge cash reserves to use in case things go wrong…

One excuse for this is “but it takes a lot of time”. Yes – it’s true when you use a spreadsheet. But with Tailwind, your cash flow forecast will update itself, check out this blog article to find out how!

Once a week is the “gold standard”

Why is once a week is a desired frequency for most companies? One week is short enough period for us to still remember most events that require us to change our assumptions. And it allows to start taking corrective actions before it is too late!