I’ve seen companies that do the 13 week rolling cash forecast. That’s a good start, but in many cases there’s a big weakness.

The flaw in the forecast is that it doesn’t tie well to the financial statements. It’s like trying to mix oil and water. What are the dangers with this?

1. The biggest danger is that items are missed from the cash flow forecast. There can be expenses that show up in the financials, but they aren’t thought of in the cash forecast, in particular non-recurring items or unusual expenses. The financial statements have a check and balance. There should be a complete record of all revenues and expenses. On the other hand, the cash flow forecast is more of a free form document. It can be subject to holes in it with missing information that could be very important.

2. It can become hard to relate one to the other. The cash flow forecast might show a variance in one direction, but the financials show variance in the other direction. So it becomes hard to say, "Why is my cash not doing well when my financials are painting a very different picture?"

3. It can become harder to produce the cash flow forecast and the assumptions might not be as clear. You have a built in discipline already with the financial statements. You already have some sets of assumptions that could be there with the budget that come through information from the financials. Why reinvent the wheel when you could instead be working with some information that you already have?

Spend time tuning up your cash forecasts to the financial statements. Go through and look at every expense that you have on the financial and ask yourself, "Where does this expense show up in the cash flow forecast?" You should be able to answer that question positively for everything that you have in your income statement and your balance sheet items as well.

Tune up your cash flow to the financial statements and you’ll find you have a truer picture of your cash needs going forward.