The Good, The Bad, and the Ugly – Disadvantages of Cash Flow Forecast
From setting strategic goals and removing uncertainties, long-term business often plans rely on cash flow forecasting. The forecasts are used in budgeting and profitability predictions, with their many applications and benefits being hailed globally as key to stellar finances. But is it really all stars and sunshine, or is there a flip side to it? As with everything, with the good, comes the bad too. One needs to weigh both the pros and cons according to their situation and then decide whether cash flow forecast serves their needs best or would they be better off without.
Let’s take a look at the bad for a change. Below are some of the major disadvantages of a cash flow forecast.
Cash flow forecast can be affected by external factors being experienced by the company, skewing the forecast. A significant increase in competition or excessive government regulation can quickly change expected cash flows. Another unforeseen factor could be changes in technology. Due to these unforeseen factors, companies expecting a certain level of cash flow will have to adjust their expectations.
You have to make use of the limited information available to make decisions in forecasting. Accountants, prior to creating forecasts, usually gather all known information. They use this information to fill in their best estimate. However, their estimate can often prove to be wrong, giving an inaccurate picture of future cash flows. Relying on rough estimates thus is a major disadvantage of the cash flow forecast.
Volatile Business Environment
One thing certain about the business environment is that it is very uncertain. Things applicable today may serve no purpose tomorrow. Factors such as federal and state regulations, effects of business competition and economy wreck havoc on cash flow forecast. To account for a volatile business environment, businesses that cast forecast cash flow into the long term often find themselves having to adjust expectations.
Cash flow forecasting involves a degree of probability no matter how valuable information the company has on hand. No forecast is ever 100 % accurate, not even in the short term. The probability of inaccuracy will increase the farther the forecast extends.
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