Mastering Cash Flow Forecasting as a Fractional CFO

Hey there and welcome back. Today we're going to tackle three big questions related to fractional CFO services and cash flow forecasts. For those of you that are new here, my name is Michael King and this is the connected accountant where I talk about starting, scaling and optimizing fractional CFO services. So, like I said, We've got three questions today around fractional CFOs and cash flow forecasts. The first question we're going to dive into is how complex should a chart of accounts be for you to be able to do a proper job with cash flow forecasting as a fractional cfo? Then we're going to dive into a question that I know hits hard for a lot of, and that's around the idea of what do you do as a fractional CFO when you put together a really robust cash flow forecast? And within just hours or days after putting the forecast together, your clients have gone off and made big spending decisions without even letting you know, therefore making your forecast completely out of date and useless. The third question that we're going to dive into is how can you minimize the amount of time it takes to put together a really robust cash flow forecast for your clients? So without further ado, let's dive in.

So I've been trying to do some forecasting and as probably everyone knows, it's always a nightmare because it changes the minute you give a forecast. You know, they spend the money or whatever. I was kind of feeling like I could do a better job forecasting if I restructured their chart of accounts a little bit and made it more detailed. And my question is, is there any reason why you wouldn't want to have a really detailed chart of accounts? And then with that, you know, I help them do budgeting and they have like, each different department kind of has their own budget. And the only way I can compare like a budget to, like what comes in through what they're spending is to have chart of accounts that kind of line up with that or are close so that I don't have to do too much manipulation.

The budgeting question more interesting in the sense that, yeah, if it doesn't match the chart of accounts, then it's a mess. So definitely I would be looking to match whatever they came up with. A budget, which usually flows through the chart of accounts. Anyway, I have a client that has like seven, eight departments. Their chart of accounts is crazy because each department has payroll and all the payroll accounts related to payroll, so expenses and all that kind of stuff. So you have wages in eight different places you got that going. And other things along the way as well. Their chart of account is really complex. Over a thousand accounts. But that's a business that's doing over $23 million of revenue. Two physical locations and two physical locations. We actually have five companies. So it's really a different ballgame. I could definitely see why it would be challenging to do a budget versus actual if the chart of accounts didn't line up, I would definitely encourage you to make them line up. Now, from a cash flow forecast perspective, my view on the shard of account is let's not expand it. It's more than it's absolutely needed. I see some clients that have like professional services and then they have KFE and whatever Ink and what? XY Ink and Atomic Inc. And all.

These accounts like, to the like, granularity of like actual vendors.

Exactly. That's totally unnecessary. I mean, you could pull up a vendor report and get that information. It doesn't need to be in the chart of accounts. Right. Again, balancing with what's absolutely needed versus kind of going overboard. Because I can definitely see how forecasting can also be a pain. If you have to look into each individual line item for one of those accounts, it would be like too difficult. So I think it's whatever is absolutely needed. That's where the chart of accounts show up.

I want to dive into on that. Is your frustration about the cash flow forecast being obsolete before you really even get started with it?

Yeah.

And you know, my thought there is. Ideally, you want to work towards a relationship where they're consulting rather than reporting. Right. So they're consulting with you before they make those big purchases that are going to materially impact the cash flow forecast rather than reporting back to you or you finding out through the financial reports that those decisions have been made. So that like, opens up a whole other can of worms about how do we drive that behavior such that you're not finding out after the fact about those really significant purchases. What's going on with that, Tori?

Exactly. That they wanted a forecast. And I said, well, I have a laundry list of questions. I can give you one the very next day. Big purchases. It was a learning experience. And I asked the questions because I want to be able to. I've already scheduled the meeting to say, hey, we need to have regular meetings. Like, this doesn't work and it's wasting your time and mind for me to put it together. If you're just going to tell me, oh, well, I just spent this and it doesn't help. And when you have these huge expenses coming in, I can't tell you how to move your cash around. I guess I just found affirmation that what I'm setting up a meeting for, and I've asked for it for a long time. I'm like, if you guys want the cash flow forecasting, I am happy to give it to you, but I need you guys to be talking to me about it and you should involve me in a lot of those financial decisions so that I can help give you the guidance that you need so desperately. But I can't do it without being in the loop on some of those big thing.

I don't know the specifics for Tory's case, but I'll talk to everybody in broad strokes about what I found to be best practice on cash flow forecasting and really any type of, like, budgets and projections. But we'll talk in through the lens of specifically cash flow forecasts. A lot of times people will get they hear the term cash flow forecast, like, oh, I need a cash flow forecast. Because I heard about it on YouTube or at a conference or a business coach or a peer business owner told me about it. I want one. And they don't necessarily really understand what it is, how it works and why it's important. So when the topic of it comes up, whether it's they reached out to you and asked for it, or maybe even on a sales call, it's really important to set and manage expectations around that cashflow forecast upfront. So you might start with a question like, oh, I love cash flow forecasts, but I'd love to hear from you, Barb. Why is it that you want a cash flow forecast and have them talk through what it is that they want to do with it and then use that to say to kind of expound on how can we be successful with that? Right. So my guess is a lot of times they're going to say, well, I'm not exactly sure what it is. Right. Because they normally don't. They kind of conceptually get it. This is your opportunity to say something like this. A cash flow forecast is a really useful tool because what we do is you and I work together, or your team and I work together to look at the anticipated cash flows in and out of the business over the coming weeks, months or years. And what we're able to do with that is we look at, you know, I'm going to use a accounting kind of language here. Don't use these words with your clients. We're going to look at beginning cash Balance, cash in, cash out, ending balance. And then when you're trying to make spending decisions, when you're trying to plan in the future for spending decisions, what we can do is we can go into the cash flow forecast and we can do what I call sandboxing, where we put those expenses in there or those additional revenues in there, and we can see how it impacts your resulting cash balance and we can decide if those are smart expenses, expenses or not. Are those expenses going to put us in a bind from a cash perspective or put us in a place where we're a little bit too at risk? We don't feel comfortable that we have enough money in the bank for a rainy day? Now, what I've learned, and I'm continuing this with, in the imaginary conversation, what I've learned, Barb, is that two things have to happen for a cash flow forecast to be really successful. Now, remember, guys, we're doing this before we've done any work on the cash flow forecast. This conversation happens ahead of time. So I say, look, two things have to happen in order for us to be successful at this. One is that I need your input in order for this to be successful. I need you to be telling me ahead of time what you're planning to do and what's coming. Because if I find out after the fact, then the work that I put into the spreadsheet into the forecast is just going to be wrong. And that's maybe even more dangerous than not having a forecast at all. The second thing that has to happen is I've got to go in on a regular basis and update it. That means I'm going to need some help from you along the way to make sure that it's updated accurately. And I'm going to need you to kind of critically think about the work that I'm doing. Don't just assume that it's the right answer. So really, Barb, this becomes a really important team effort from both of us for it to be successful. I'm not exaggerating. I would go into that level of detail ahead of time. Tori. And then even on the first couple of calls where you're updating it, really, it goes back to setting and managing expectations and really driving that home. When they do a good job of updating you ahead of time, reinforce that behavior. Hey, Barb, this is exactly the kind of stuff I need to know about. So thank you so much for sharing this with me before you made it on those times where you find out afterwards, go ahead and do the opposite. Say, hey, this would have been, I know it's hard. I know you're busy. This would have been really helpful to know ahead of time. And that should be true, really, with anything you do with the client. You really want to set and manage those expectations up front so that you're not in a position where you're from frustrated, they're frustrated. Why did we do this? You know, recalibrate everything now. So I don't know if again in Tori's situation, if you did that, but I see a lot of people missing that opportunity. So I wanted to make sure I was, I shared that. Does that make sense to everybody? Carlos, did you have anything that you wanted to chime in on that one?

I got the feeling also that this might be a process that's longer than necessary to build these forecasts. I mean, we went through this in the workshop. You know, we need to get a first draft out there so that the client can actually see what a forecast looks like or a projection looks like. So if we're thinking like a AICPA forecast or projection, right, with assumptions and three way financial statements and all that kind of stuff, then it's harder to get that information out there and show it to the client and see. Okay, that makes sense. Like we can use that. That would be the first thing I heard you mentioned, kind of the ability to connect with the client on a more regular basis. And this is something we've talked about many times, the checking calls and establishing those, that would be a place that it's ideal to go over a fore or projection or get the information or the feedback that you need before going into a CFO call and actually presenting the information. Right. So I think we under use or under leverage the checking calls. The way I, I look at it is yeah, I'm helping the client, but I am also getting prepared for the CFO call. Right. So I'm getting information that I need. For example, today I was looking, hey, we're meeting next Friday. Remember to send me the projections for 2023 that we were looking at a couple of weeks ago. Oh yeah, I'll get that to you no later than tomorrow. That gives me a whole week to Prepare a project 2023 that we're looking at next Friday. So checking calls, very important. I also saw on the, on the chat the use of classes. Yeah, we got classes, we got tags in QuickBooks, locations in QuickBooks. So there's a whole bunch of ways to split up financial data that we don't need necessarily to create a new chart of accounts for. And then the other question was around using other tools for forecast and budgeting and all that kind of stuff. I don't use budgeting in my conversations and we went through that in the workshop. The differences between a budget, a FOREC and a projection, right? From our perspective, budgets are not as useful in a CFO call. It's very useful for for the perspective of managers. If I'm a manager of a business unit or a department, I would definitely want to know how much cash I have to spend on payroll or supplies on all that kind of stuff. But from a forward looking perspective on a CFO call, it's less valuable to inform of a budget versus actual. I definitely like projections. The best forecast kind of come in second, especially for the CL clients that have low cash or tight cash flows. Definitely a forecast is absolutely needed and then the final tool will be budget. Now do I help create those? Absolutely. But I put them in QuickBooks and I help them kind of upload that information. And now if you want to see it, you just pull a report of budget versus actual. But I'm not engaged in that.

So what you just heard was a replay from TCA Pro. If you're not familiar with TCA Pro, it's my monthly group coaching program where my team and I go live and teach on topics related to to starting, scaling and optimizing advisory services. In addition to that, we also do office hours. That's what you just listened to, where we go live on Zoom for an entire hour every month. And we take questions from people in our community like Tori, where we help you answer the most pressing questions that you have about your firm. If you're interested in learning more, go to theconnectedaccountant.com community. In the meantime, I can't wait to see you right back here next week, my friends. See you then.