Cash flow forecasting is a critical part of business planning and budgeting. It’s also one of the most common mistakes that businesses make.
If you’re new to cash flow forecasting or have never done it before, this article will help you avoid common pitfalls and get started on the right track.
Mistake #1: Relying Too Heavily on Historical Data
The first mistake is relying too heavily on historical data. While it’s important to look at past performance, you also need to account for external factors that could affect your business in the future. For example, if you’re forecasting cash flow for a new product launch and sales have been trending downward over the past few months, then it’s likely that they’ll continue this trend when your new product launches.
If you’re trying to predict how much cash will come in from customers or suppliers at different times during the year (or even month), make sure you’re using current information instead of relying solely on historical data from previous years’ performances.
Mistake #2: Not Considering Unexpected Expenses
You should always be prepared for the unexpected.
As a critical access hospital CFO, it’s crucial to remain prepared for unexpected costs.
Estimate the financial resources needed to cover unforeseen expenditures, such as emergency equipment repairs or sudden increases in staffing requirements. Incorporate a contingency fund into your hospital’s budget to accommodate these expenses and update it as the organization’s circumstances evolve (e.g., service expansions or facility upgrades).
Ensure that the allocated emergency funds are safeguarded from creditors in case of financial distress or bankruptcy by maintaining them in a separate account, distinct from other accounts more susceptible to creditor claims (like operational accounts).
Mistake #3: Not Accounting for Seasonal Variations
When forecasting cash flow, it’s important to account for seasonal variations. This can be done by looking at past data and comparing it with current trends. For example, if your hospital has seen an increase in admissions during the summer months, then you’ll need to plan accordingly by budgeting more money for payroll and supplies during those months.
If you’re not sure what kind of seasonality exists at your hospital or if there are any trends that have developed over time (e.g., more patients come in during winter), then look back at previous years’ data and see if there are any patterns or anomalies that stand out from year-to-year.
Mistake #4: Not Planning for Growth
Planning for growth is an important aspect of cash flow forecasting, but it can be difficult to predict how much demand will increase and when. If you’re not sure about how much your hospital’s capacity can handle, it’s best to err on the side of caution by estimating conservatively.
You should also consider whether there are any upcoming changes in your community that may affect patient volume or other factors that could impact your forecasted revenue (such as new legislation). For example, if there are plans for a new hospital nearby or if there are plans for an expansion at another local facility, this could have an effect on your own business plan going forward.
Mistake #5: Not Taking Into Account Long-Term Investments
You’ve probably heard the saying, “a bird in the hand is worth two in the bush.” This is true when it comes to cash flow forecasting as well. You can’t know for sure what investments will bring you returns and which ones won’t, so it’s better to plan conservatively and err on the side of caution when making assumptions about future revenue streams.
In order to account for long-term investments in your cash flow projections, you’ll need an understanding of your hospital’s long-term goals and objectives–and how each new investment fits into those plans. For example: if an organization wants to build up its patient base by acquiring more beds or hiring more staff members within five years’ time frame (which would require additional funding), then those costs should be factored into any forecasts made during that timeframe; however if there are no concrete plans regarding growth within this period then these expenses may not need accounting for now but could potentially come into play down the road once those goals are achieved!
Conclusion
In order to get the most out of your cash flow forecasting, it’s important that you understand what your hospital needs. You should be able to answer questions like:
- What are our top priorities?
- How much money do we need in order to meet those priorities?
- When will we need this money by and how will it be spent (e.g., payroll or supplies)?
Once you’ve answered these questions and created a realistic plan for meeting them, it’s time for another step: making sure that everyone on staff understands their role in achieving those goals. You’ll want to make sure that everyone knows what they’re responsible for when it comes down to forecasting–and then hold them accountable if they don’t deliver on their promises!
