Effective financial management is critical for any business, and cash flow forecasting is a vital tool in achieving this. By anticipating cash inflows and outflows, companies can plan their immediate cash resources and allocate finances accordingly. This is particularly important in today’s business environment, where companies are under constant pressure to use their cash flow efficiently.
Microsoft Dynamics 365 Finance offers a suite of powerful tools to assist businesses in managing their cash positions, surpluses, and shortages effectively. While the finance team is responsible for forecasting cash flow, it requires input from multiple data sources and stakeholders to build an accurate forecast. The forecast should consider all sources of cash inflows and outflows, such as sales revenue, operating expenses, capital expenditures, debt repayments, and interest payments, and can be broken down by week, month, or quarter.
Handling cash flow and conducting cash flow forecasting is a repetitive and manual job. This leads to unproductivity. So, most companies rely on Microsoft Excel solutions of varying complexity. But there are several challenges associated with accurately forecasting cash flow. Decision makers often lack access to data that is scattered across different systems such as accounting or enterprise resource planning software, financial planning tools, Excel, and other software applications. This dispersed data can lead to difficulties in forecasting accurate cash flows, as internal knowledge is often confined within separate departments or “silos.”
Furthermore, it can be challenging to evaluate the accuracy of cash flow forecasting after the financial results have been realized, which can result in uncertainty and potential discrepancies.
The most suitable method for predicting cash flow for your enterprise depends upon your company’s goals, the prerequisites of your management or investors, and the accessibility of data within your organization.
Cash flow forecasting in Microsoft Dynamics 365 Finance is a process of predicting the cash inflows and outflows of a business for a specific period. It involves analyzing historical cash flows and using that data to predict future cash flows. Microsoft Dynamics 365 Finance helps businesses to analyze cash flows, create forecasts, short-term liquidity needs, debt repayment, and make strategic finance decisions effectively. The prerequisites for the cash flow forecast are:
– Classifying and listing all the liquidity accounts. A company’s accounts for cash or its equivalent are known as liquidity accounts.
– Setting up the forecasted behavior for transactions that impact the liquidity accounts of the company.
Accounts receivable, accounts payable, general ledger, and budget and inventory management can be integrated in cash flow forecasting. During the forecasting process, the system utilizes transactional data that has been inputted, and through the calculation process, predicts the anticipated cash impact of each transaction.
The cash flow forecasting feature in Microsoft Dynamics 365 Finance allows businesses to:
1. Define cash flow forecast models: Businesses can create multiple forecast models to represent different scenarios, such as optimistic, pessimistic, and most likely. These models can be based on historical data, market trends, and other factors.
2. Track actual and projected cash flows: Microsoft Dynamics 365 Finance allows businesses to track both actual and projected cash flows in real-time, providing a complete view of their cash position.
3. Analyze cash flow trends: Businesses can use the cash flow forecasting feature to analyze cash flow trends over time, categorize prospective cash deficits or surpluses, and plan strategically.
4. Customize reports: Microsoft Dynamics 365 Finance allows businesses to customize their cash flow reports to meet their specific needs, such as by currency, business unit, or date range.
You can configure cash flow forecasting in Microsoft Dynamics 365 Finance by following these steps:
Step 1. Set up a cash flow forecast model
A cash flow forecast model is a template that defines the structure and parameters of a cash flow forecast. Follow these steps to set up a cash flow forecast:
1. Go to Cash and bank management > Cash flow forecasting > Cash flow forecast models.
2. Click on New to create a new cash flow forecast model.
3. In the Name field, enter a name for the cash flow forecast model.
4. In the Base currency field, select the base currency for the forecast.
5. In the Period type field, select the period for which the forecast will be created, such as daily, weekly, or monthly.
6. In the Forecast type field, select the type of forecast model you want to use, such as an optimistic, pessimistic, or most likely model.
7. In the Cash flow type field, select the type of cash flow you want to forecast, such as operating cash flow, investing cash flow, or financing cash flow.
8. Click Save to save the cash flow forecast model.
Step 2. Define the cash flow forecast parameters
The next step is to define the parameters for the cash flow forecast. To define the cash flow forecast parameters, follow these steps:
1. Go to Cash and bank management > Cash flow forecasting > Cash flow forecast parameters.
2. In the Cash flow forecast model field, select the cash flow forecast model you created in step 1.
3. In the Starting date field, enter the date from which the cash flow forecast will begin.
4. In the Ending date field, enter the date on which the cash flow forecast will end.
5. In the Include actuals up to field, select the date up to which actual cash flows will be included in the forecast.
6. Click Save to save the cash flow forecast parameters.
Step 3. Create cash flow forecast lines
Cash flow forecast lines represent the individual cash inflows and outflows that will be included in the forecast. To create cash flow forecast lines, follow the below-mentioned steps:
1. Go to Cash and bank management > Cash flow forecasting > Cash flow forecast lines.
2. Click on New to create a new cash flow forecast line.
3. In the Cash flow forecast model field, select the cash flow forecast model you created in step 1.
4. In the Account field, select the account for which you want to create the forecast line.
5. In the Transaction type field, select the type of transaction for which you want to create the forecast line, such as sales or expenses.
6. In the field of Amount, mention the amount of the transaction.
7. In the field of Date, mention the date on which the transaction will happen.
8. Click Save to save the cash flow forecast line.
Step 4. Run the cash flow forecast
The final step of the configuration is to run/execute the cash flow forecast. Carry out the below-mentioned steps to run/execute the cash flow forecast.
1. Go to Cash and bank management > Cash flow forecasting > Cash flow forecast.
2. In the Cash flow forecast model field, select the cash flow forecast model you created in step 1.
3. In the Cash flow forecast parameters field, select the cash flow forecast parameters you created in step 2.
4. Click on Refresh to generate the cash flow forecast.
5. Review the cash flow forecast report to analyze the predicted cash.
Large corporations often allocate substantial resources to forecasting at the corporate and business levels. However, a considerable amount of time and effort is often spent on low-value tasks such as collecting and manipulating data in spreadsheets, rather than gaining valuable insights from the data.
While spreadsheets are essential for finance and treasury functions, automating the entire cash flow management process can reduce manual effort by up to 90% required for creating and analyzing a forecast using spreadsheets. Additionally, automation can help organizations expand and adapt their forecasting process as they continue to grow and evolve. Enterprises can also integrate various tools like SAP and Salesforce to access reliable cash flow forecasting within no time.
If you wish to automate the cash flow forecast for your business, DynaTech Systems can help you achieve this. DynaTech Systems is a Gold partner of Microsoft. Reach us at sales@dynatechconsultancy.com for further assistance.