Reforecasting in uncertain times

Reviewing and revising cashflow forecasts and budgets is essential for any business in uncertain times.

Following momentous and ongoing changes to the market, most companies are having to redo their financial forecasts. At a minimum, this involves the cashflow forecast but for larger companies it might also entail reexamining their entire budget.

Why forecast cashflow?

A cashflow forecast (also known as a cashflow budget or cashflow projection) is a practical tool to help make sure your business has the cash it needs to function.

It estimates how much cash is coming in and going out over a specific period (usually one year), and exactly when. It can help you see bumps in the road before you hit them.

The forecast may indicate whether your business needs to borrow money and, if so, how much you'll need. It also sets out when and how you'll be able to repay lenders.

It needs to include key indicators suitable for your business, such as:

• cash in hand
• debtor days
• inventory days
• supplier days taken
• total sales

For more information on what these terms mean, read our guide to managing cashflow.

What's the difference between a profit and loss budget and a cashflow forecast?

Your profit and loss (P&L) budget is your financial plan for what you're going to sell, what it will cost, and what overheads you'll need to pay , including interest.

It essentially sets out how much profit or loss the business is planning to make. It's important to note that you budget on a profit and loss basis, meaning your income and expenses are accounted for at the point you incur them, regardless of when they're actually paid.

In contrast, the cashflow forecast is a plan of when cash will move in and out of your business.

What is reforecasting?

Reforecasting means updating the budget in question (your cashflow forecast or full profit and loss budget), based on new facts and circumstances, and changing any elements as necessary. The end result is a new, fully revised, budget.

A reforecast allows the people within your business to understand the new route to follow and what lies ahead. It provides a more relevant decision-making tool than the former, static budget.

When should my business reforecast?

You should reforecast whenever there is a material event - losing a big contract, for example - that affects your cashflow. In addition, you should consider reforesting if trends indicate that your original forecast was inaccurate and that the underlying assumptions behind it were wrong.

The need for accuracy

Remember that while forecasts are important, they are only as reliable as the assumptions you make and the data you put into them. Clearly, if your data is highly inaccurate, your forecasts will be wrong. And beware forecasting optimistically.

That's why it makes sense to reforecast on a regular basis. How regularly will depend on your business and what resources you have available to manage the process.