1 Books not up to date
If you don’t know your starting point, you can’t forecast. The current cash balance, accounts receivable balance and accounts payable balance are vital to cash forecasting. If your books are not up to date, you may have difficulty forecasting.
If you invoice from another system that’s not connected to your accounting software, your accounts receivable balance will be wrong the instant you send an invoice – more often than not invoices and customer payments are not reconciled until weeks or even months after the fact.
Say you fail to enter a vendor bill into your accounting system, your accounts payable balance will be off. If you don’t record a payment to a vendor, your AP balance will be wrong. Again, these things are sometimes not reconciled for weeks or months.
Even the bank balance may not be accurate in your books. If you haven’t reconciled and closed the books lately, things may be well off. Even if you have, you may notice that some transactions on your credit cards show as ‘pending’ for a few days. All this affects your ability to pay vendors and use cash.
2 Unpredictable Customers
Business owners have control over exactly when they pay their vendors. You have no control over when your clients/customers pay you. If you have a larger volume of low paying clients, it’s important to gather data about churn and delinquency – i.e. the percentage of clients that cancel, service, default or pay late. If you have a few high value clients, you need to track their payment histories individually in order to make predictions. Some companies need to do both. Operations practices like credit checks and strong account management can prevent or avoid clients’ bad behaviour.
3 Surprise Bills
Business owners are sometimes stung by unexpected demands on cash. This might be the annual renewal fee for a software contract, a 3-payroll month (for bi-weekly payroll), a client entitled to a refund, or a demand from a government agency for misfiling. Some of these surprises cannot be avoided, some come with rigorous analysis and good financial management.