Cash Flow Modeling offers a number of upsides to proactive business management. This discipline requires that the model represent a reasonable representation of how your business will respond dynamically to various business conditions, stimulus or adversity. Consequently executive management can anticipate a cash crisis ahead of time, adjust the timing of various cash based decision, and establish strategies to address business processes and policies to better handle unexpected demands for cash.
However, a cash flow model can result in unintended consequences better known as downsides in business that can result in serious “cash” surprises. The following details a number of conditions where you can be at risk when using a cash flow model in your business.
Model Validation Building a cash flow model is not a trivial undertaking and requires the integration of business knowledge from various operations and departments and a high degree of attention to detail. It is not unusual to “rush” a recently developed model into use without exercising the range of conditions it was designed to handle to make sure that the numbers produced are reasonable and appropriate. Any model should be used for several cash forecast cycles to improve the confidence level of the model before putting it into use as a major decision tool. Executive Understanding New Information Accuracy Forecast to Actual Analysis
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Summary
Do all of the considerations above void the value of using a cash flow model? No! Like any other business tool you need to know how to use it, when to use it, when it needs to be serviced and when to upgrade it. Effectively using a cash model and related process will give you a leg up in managing your business wisely and competitively.
Do not let the task of developing a cash flow model keep you from doing one. You will learn a lot about your business that will be invaluable. Your model can be developed in stages where with each new stage you can place increasing degrees of confidence in the results forecasted. Even an elementary model can be of value by causing you to bring all of the data together that influences the use of cash that would otherwise be overlooked. If you keep the value of the cash flow model in perspective and manage its role responsibly you will avoid many of the downside considerations discussed above.
Good luck in developing and using your cash flow model responsibly!
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