The question may seem simple – the answer can be simple or complex, depending which factors you consider and how sophisticated of a model you would like – and how far out you want the prediction to be within a corridor of a certain accuracy. In other terms: if you want to know how much money will be in your bank account in 6 weeks, 6 months, or even a year from now, you need to add seasonality and other trends to your forecast.
The following areas should be looked at:
- Cash Receipts/Incoming funds: this is mainly sales, and potentially other areas as well, like funding, bonds that are paid, sale of assets out etc.
- Critical in this area is the prediction of when your customers will pay you. If a customer is paying on time or late, usually follows a pattern. And it does not have to be the same pattern every month: some customers just hedge their cash for the quarter end, when they have to report their finances. So seasonality and particular payment behaviour patterns of customers should flow into this side of the forecasting.
- An average DSO per customer helps to predict the behaviour of the top 20% of your customers for more precision
- Disbursements: the biggest chunk here is usually Payroll and Accounts Payable for the stuff you procured. Do not forget due interest payments and potential payout to owners / dividends. This side is not only something you can predict pretty well, but as well take corrective action if needed (slow down hiring, procure more expensive items later).
The more data you have – especially around payment patterns of your customers – the more precise you can predict. Per our experience it takes about 1 year of customer payment data to make a precise enough prediction of their payment patterns. If you do not have enough data yourself, you can still obtain historical payment behavior from Credit Rating Agencies.
Start building a collection forecast per period (month) and track how you’re doing against it. That will help to refine the cash receipt forecast, and with that be more precise on your cash flow prediction.
Technologies like NetChain2 will not only help you predict your cash flow, but using its intelligence and AI decision logic, help to ensure your targets are met. Check out NetChain Squared’s technology to learn how to use the intelligent connected network to go beyond predicting and know the payment dates.
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