Understanding the impact of future trends can help professional services firms weather difficult times or take advantage of opportunities.
By Abe Valdez Bravo, Senior Lead Economist
One major factor shared by most successful companies is the ability to deal with adversity. Difficulties can come in many forms, from cyberattacks and interest rate hikes to recalls, lawsuits and stock market volatility. But there is at least one thing companies can do to help them roll with these punches: cash flow forecasting. Businesses in all industries use these techniques to attempt to see into the near- or long-term future and project the impact of multiple economic factors on their operations.
Cash flow is the lifeblood of a business. We all know how companies get it: by selling goods and services or investments; and they decrease it by paying down expenses like taxes, salaries or invoices for expenses. Having positive cash flow is so important because, among other things, it increases a company's liquidity, hardening its ability to withstand trying times like a once-in-a-century (hopefully) global pandemic. Without it, a company will quickly go into debt, be forced to sell off assets, or even declare bankruptcy. However, by using cash flow forecasting, a business can mitigate some of their risk by predicting when it might be a good time to spend versus save for a rainy day.
Why You Need a Cash Flow Forecasting Model
There are significant benefits to having a qualified professional develop a cash flow forecast. The act of putting together a cash flow forecasting model can help firms anticipate the outcome of several different events, from adjustments in tax policy, to changes in debt and interest rates, rising labor costs, to revised government regulations, among other macroeconomic variables. The outcome of the forecast can give management or owners of a company a range of scenarios for the future, which can enable them to develop agile business strategies to either increase investments or save cash.
Fundamentally, a cash flow forecast can help management reduce risk when making plans. A business that utilizes these models can make proactive business decisions to avoid unexpected funding issues or take advantage of the right investment opportunities. The models can act as a canary in a coal mine, warning about different economic scenarios before there are liquidity problems or a surplus is not used to grow the business.
The best models provide a spectrum of options against multiple "what-if scenarios" that could impact a business's cash flow for both the near- and long-term. Having concrete scenarios to consider then provides guidance on developing strategies or making adjustments that prepare the organization for any potential cash flow impact. It allows a business to initiate pre-emptive measures that foster growth, stability, or both.
The results from a cash flow forecast can act as a "master key" to unlock doors to new strategies, innovations and business ideas. These opportunities can range from M&A activity, developing new products or just expanding operations, and are calibrated for the possible impacts they could have on a company's cash flow. A robust, professional, cash flow forecast model is an attribute of a company that has strong institutional knowledge of its business. This can be an effective way to develop support from external stakeholders such as investors or bankers.
Start Your Cash Flow Forecast Modeling Today With BPM
In today's rapidly evolving business environment, companies need to understand how a changing economy will impact their cash flow. Modelling is a powerful tool for management and owners to get visibility into a business's possible future cash flow. It evaluates future cash positions against a variety of potential variables. Crucially, it gives management a clearer view of what is expected and what could happen to a company if there are significant movements in certain economic factors. Having the ability to assess the impact of these factors is a powerful tool to protect, increase, and preserve the principal source of existence of any company.
To take the first step, turn to the professionals at BPM's Economic Consulting Service. They can provide a variety of forecasts and reports that will help any business to plan effectively for an uncertain future. To learn more about how we can help, contact Abe Valdez, BPM’s Senior Lead Economist and a Director in our Advisory practice, today.