A Treasurer’s Step-by-Step Guide to Adopting a Direct Cash Flow Forecast

Guest Post by Stefanie Layne

Without cash, a company can’t survive. That’s the problem for some firms, but there’s an equally disturbing issue plaguing other companies and stymying their growth. They have cash but lack a definitive handle on how much is available in their coffers at any given time. This is because they’re still relying solely on traditional or indirect cash flow forecasting based on quarter-end financial statements. Why wait on that retrospective view when you can see what’s happening long before quarter-end? As the Director of Treasury at Unity Technologies, the latter option is infinitely more useful to me. That’s why I’m a huge proponent of direct cash flow forecasting, which is a method for monitoring real-time cash inflows and outflows to more accurately and confidently predict your true cash position in order to make more informed strategic decisions. In a nutshell, here’s my process for successfully adopting direct cash flow forecasting.

Step 1: Pull the Bank Reports

Start where the money’s located—your bank accounts. Identify every company bank and investment account. For each one, note all deposits and withdrawals made over the last several months.

Step 2: Identify What's Coming In and Going Out

Dig into each transaction to specifically identify its source and note its timing within the month. With cash inflows, make sure to capture the sources within each of these categories:

• Customer payments
• Earned interest
• Investment earnings
• Sale of physical assets
• Sale of investments
• Capital influx

For cash outflows, do the same for these:

• Payroll
• Vendor payments
• Interest payments
• Tax payments
• Purchases of physical assets
• Investment purchases
• Dividend and stock buyback payments

At the end of this process, you should have a real understanding of the vast majority of your company’s incoming and outgoing transactions—rather than a vague idea.

Step 3: Locate Information Sources

Now, you want to map each of those transaction types back to the department or staff who:

• Owns the data, such as the AR or AP team
• Manages the processes related to the transaction, such as the team who handles payroll runs
• Influences cash flow, such as sales and customer fulfillment on the front end and collections on the back end

Step 4: Partner Up

Next, it’s crucial that you start building strong partnerships with those above-mentioned groups. For example, sit down with the AP team to learn the ins and outs of AP vendor runs. Do the same with the team who handles payroll runs and bonus payouts. And so on. Through these partnerships, you can identify ways to maximize cash flow at any given time.

Step 5: Refine, Refine, Refine

The steps to this point let you apply more logical and informed assumptions to your expected cash inflows and outflows so that you can more accurately project how and when to get cash where it needs to be at the most advantageous time. At quarter-end, compare your direct and indirect cash flow forecasts to see what impact your implementation is having on the bottom line. Then, start monitoring your real-time cash all over again and refine it once more.Want to learn more from Stefanie Layne about direct cash flow forecasting and how she connects it to the indirect cash flow forecast? Listen to Tesorio’s recent webinar, Solving the Cash Flow Disconnect.