Get a grip of your runway: Master cash flow forecasting

Get a grip of your runway: Master cash flow forecasting

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Financial planning has become essential because of the current macroeconomic conditions. In this climate, it’s better to be safe than sorry and prepare for a general downturn.

It’s important to remember that financial planning and analysis aren’t absolute. Never think about financial analysis as a crystal ball; instead, it’s about understanding the book-ended outcomes of the best and worst-case scenarios.

Cash flow is a big concern for ecommerce businesses. The gap between creating a product and selling it can be challenging, and forecasting becomes an indispensable tool to optimise your cash flow in an unpredictable economic climate.

What is the best way to forecast for a downturn?

Forecasting can help ensure you have a long enough runway to survive a downturn, understand your ROI, identify areas of improvement and see where the organisation should focus their efforts.

Start by looking at your expenses and see what you’re spending month by month. You should consider:

●     Variable expenses - these change depending on how much you sell, for example, production and shipping costs. You want to ensure you make enough of a profit margin.

●     Fixed costs, like salary and office expenses, are the same costs you pay every month and don’t vary depending on your sales.

Next, look at your revenue and see how different scenarios would be affected if this decreases. Set up a base case (-25%), a downside case (-50%) and an upside case (0%), then make decisions to be prepared based on the worst-case scenario.

To get started, don’t focus too much on the details and keep it very high level. You need to see how long existing cash reserves will last and how different scenarios will affect your cash flow.

For each scenario above, see how your metrics like your gross margin will be affected. How much will you have left to cover your fixed costs if sales decrease? What do you have in the bank? How will this affect your cash flow? These questions will give you a runway for how long you can survive without having to take more radical steps to reduce fixed costs.

Keep an eye on your KPIs

Monitor your finances at daily or weekly intervals. You need to know if you’re tracking against your downside, best or upside case. Focus on 2-3 KPIs, and set triggers of when to act if you start moving towards your worst-case scenario.

Let’s take this example; if, after three months, sales have reduced by 20%, then you can assume that you’re on the way to your downside scenario. You’re now in a position where you should decide how to proceed.

Speed is vital here. Ideally, you want to close your financial accounts within five days of the month's end so you have a ‘real-time’ picture of your performance. This is where the right tools and automation become essential.

Act fast with finance automation

Meaningful financial planning needs automation to get the right information quickly. The time it takes for businesses to close monthly accounts is a real problem – most of the time, it happens three weeks after the month ends. This lag in understanding can be critical if you’re tracking against the milestones you set up.

Administrative tasks are the reason for this lag, and it’s a real issue for finance teams. It takes a lot of time to collect and understand financial information from lots of different sources. Once it’s collated, teams often have so much information that it becomes difficult to focus on the real needle number and what will make a difference for the business.

Collecting financial information and understanding it must be quick to close this gap. Ideally, you want to have the processes in place to understand your cost base within a week. That’s where financial automation steps in.

Automation that combines multiple information sources into a dashboard with usable insights can help cut through the noise. It enables finance teams to have a timely view of their finances and act fast if they see any issues.

Get the right insights

Revenue is easy to track, but the process becomes a bit tricker when it comes to cost. Automating tasks like invoice management, bookkeeping, and collating all your information sources into usable insights becomes key to a firm understanding of how the business is tracking compared to your budget.

Using tools like Juni, expense management software, and accounting automation which reduces the complexity of putting financial information together, makes this window smaller so you can make faster decisions.

It’s also important to look outside of your standard ERP software. Tapping into data sources from other teams will help you understand how specific actions affect the numbers so you can track the right KPIs.

Final thoughts

Forecasting is a key part of financial planning, and when done right, it can help you prepare in an uncertain climate. But, the right software is essential to ensure you have the right data at the right time to act fast. 

Get a grip of your runway: Master cash flow forecasting
Juni
Financial platform

Juni is the financial platform built for ecommerce. We give you a unified view of your finances, with cards, mulitcurrency accounts, and banking, accounting and advertising integrations - all in one place. We can even help boost your cash flow with working capital, cashback and more.

Download our free whitepaper and gain important ecommerce and marketing insights, directly from Juni.

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