Disadvantages of Cash Flow Forecasting

Disadvantages of Cash Flow Forecasting

Cash Flow Forecasting

Long-term business plans often rely on cash flow forecasting as a way to set strategic business goals and remove uncertainties. However, cash flow forecasting does have its disadvantages. It is best to weigh both the pros and cons according to your specific situation and decide whether it serves your needs.

Disadvantages of Cash Flow Forecasting

  • Unforeseen factors
  • Limited Information
  • Volatile Business Environment

 

Unforeseen Factors

External factors facing the company can have a skewing effect on the cash flow forecast. A significant increase in competition or excessive government regulation can quickly alter expected cash flows. In this day and age, another unforeseen factor could be disruptive changes in technology.

 

Limited Information

Prior to creating forecasts, accountants gather all of the known information available. They use this information to create their best estimate. However, this estimate can prove to be wrong and will give an inaccurate picture of future cash flows. Having to rely on rough estimates is a major disadvantage of cash flow forecasting.

 

Volatile Business Environment

The only thing that certain in the business environment is uncertainty. Things that are applicable today, may serve no purpose tomorrow. Factors such as federal and state regulations, effects of business competition, and economy can wreck havoc on cash flow forecasting.

No matter what information the company has on hand, cash flow forecasting involves a degree of probability. Unfortunately, no forecast is ever 100% accurate.

 

Are you looking to grow your business? Take ActionCoach’s Business Diagnostic Test to get a full picture into your business. The test will provide you with valuable insight into what areas your business needs improving. 

Business Coach Rob Carol represents Action Coach Canada.

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