What to Do When Your Cash Flow Software Data Contradicts Your Expectations?


Cash flow forecasts are only predictions, so some variations between forecasts and financial reality are normal. But what do you do when there is a discrepancy that significantly impacts your business operations?

Keep reading to learn how to confirm when there is a discrepancy in your cash flow forecasts, how data accuracy and cash flow classification can lead to discrepancies, and how to resolve these issues.

What Constitutes a Discrepancy?

Cash flow forecasts are rarely 100% accurate. Therefore, there will always be some difference between projections and actual cash flow. A discrepancy with cash flow forecasting software is when your actual cash flow differs significantly from your projected cash flows. Discrepancies can occur for many reasons.

Initial Steps to Confirm the Discrepancy

To confirm a discrepancy in your cash flow forecasting, compare your cash flow forecast with your actual cash flow. Perform variance analysis to detect any major differences between actual and planned cash flow.

You can also use a tool like Cash Flow Frog to compare planned vs actual cash flow. Communicate with the appropriate departments and employees to confirm a discrepancy. 

Impact of Discrepancies on Business

Discrepancies can affect a business in a variety of ways. When a company's actual sales differ from its planned sales it may experience stockouts, excess inventory, lost sales and supply chain disruptions.

Discrepancies between actual and planned expenses can lead to budgeting issues or misuse of capital. When there is no consistency between a forecast and financial reality, a business may struggle to allocate capital and resources efficiently. 

An inaccurate forecast may also result in businesses taking a conservative approach when not necessary, leading to missed business opportunities.

Identifying the Causes

Where to Look for Common Issues?

A good place to start looking for root causes of discrepancies is input data. Poor data accuracy or irrelevant input data can result in inaccurate cash flow forecasts. Also look at your forecasting methods, your assumptions and the level of detail in categorizing cash flows.

Analyzing Cash Flow Components

To look further into the cause of the discrepancies, look at the main components of cash flow: 

  • Classification

Misclassifying sales or expenses can lead to inaccurate cash flow forecasts. For example, interest on debt should be listed as an operating activity but is often misclassified under financing, creating a discrepancy between actual and planned cash flow.

  • Timing

Timing of payments can also distort cash flow. For example, if you plan to receive payments from customers in the current period, but in reality, payment will be delayed until the next period, there will be a discrepancy.

  • Missing/duplicate transactions

Some costs, like maintenance costs, are often overlooked and can lead to skewed cash flow forecasts. Adding a transaction twice can also distort your cash flow analysis.

  • External Factors

Factors out of your control, such as downturns in the market, supplier issues and regulatory changes can cause differences between your planned and actual cash flow. 

Photo by Nick Chong on Unsplash

Addressing the Discrepancy

Adjusting Your Cash Flow Forecast

Cash flow forecasting is a continuous process. Once you’ve identified the discrepancy you can update your data, collection methods or forecasting models to avoid the same mistake from happening again. If external factors affect your cash flow, consider them during future forecasts.

When to Consult a Professional?

If you’re having trouble identifying the cause of discrepancies, you may want to hire an expert. Cash flow analysts have the knowledge and experience to find the cause of your discrepancies and can help resolve the issue. Outside experts can also provide a fresh perspective.

Leveraging Software Features for Better Accuracy

Cash flow software can improve the accuracy of cash flow forecasts. Tools like Cash Flow Frog allow you to import data from existing spreadsheets and accounting software, eliminating errors that occur with manual data entry. 

Cash flow software allows you to easily compare planned vs actual cash flow, which is useful for reducing discrepancies over time.

Preventing Future Discrepancies

Maintaining standardized collection methods across your organization can help you avoid discrepancies caused by poor-quality data. Ensuring cash flow classification is detailed and accurate can also reduce discrepancies. 

Continuous monitoring and evaluation of cash flow forecasts and actual cash flow is crucial in preventing future discrepancies. Learn from past mistakes and aim to minimize discrepancies over time.

In conclusion

Discrepancies can lead to disruptions in business operations, such as lost sales, excess inventory and missed opportunities. If you've identified a discrepancy in your cash flow forecasting, first look for root causes, such as data accuracy, collection methods, misclassification and external factors. 

Once you’ve identified the root cause, make the necessary adjustments to your cash flow analysis to avoid the same mistakes in future forecasts.

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