Cash comes first

How forecasting cash should not be a difficult chore with the right technology

I recently came across an article in Accounting Today titled:  “Art of Accounting: Start with the Cash”, authored by Edward Mendlowitz, CPA, a partner at WithumSmith+Brown, PC, CPAs.

In this article the author tells a story of an audit he once performed with an assistant where the author decided to perform the cash accounts audit by himself, a task usually delegated to junior accountants and regarded more of a “chore” than “serious” audit work.

As the author of this article points out, cash is one of the most important accounts on a company’s balance sheet and is at the top of the chart of accounts and the first line on the balance sheet, being the most liquid asset.  By auditing cash first and with its many in and out transactions, one can learn a great deal about the business under audit.

I can personally relate to this story as I have seen on more than one occasion how cash accounts were given to entry level or junior accountants, especially in larger accounting firms.  The reason was usually:  “They need to start somewhere”, and “doing a lot of grunt work in auditing cash accounts is a good place to start”, something senior auditors may regard as “unimportant” or perhaps a “chore better left to junior accountants”.

There is sometimes a similar mentality when it comes to cash planning and budgeting or forecasting the company’s cash flow.  The focus is often on the P&L (Income Statement) and achieving a desirable net income.  Cash and other balance sheet accounts are often not part of the budget preparation process.

To make things worse, those who decide to plan and budget their cash quickly realize that cash is very difficult to forecast.  Unlike its actual counterpart, though tedious to review or audit because of the numerous transactions flowing through this account, forecasting cash account balances with any degree of accuracy and completeness is not feasible using common planning methods and tools (e.g., spreadsheets or other purpose designed software tools that behave like spreadsheets).

In order to be able to successfully forecast cash we need to use a completely different approach.  We need to have the beginning cash balance (taken from the closing cash account balance in the accounting or ERP system) and consider all cash transactions resulting from all forecasted activities in our plan or budget.  What this means is that every item we forecast (sales, inventory costs, operating expenses, personnel expenses, buying and selling of fixed assets, borrowing activities and repayments, etc.) must be considered in order to arrive at a forecasted balance for each of the budget periods in our plan.

This cannot realistically be accomplished using a spreadsheet or even specific budgeting and forecasting software applications that use a “spreadsheet” like approach (with formulas, functions, data links, etc.).

Thankfully, there is a radically different way to do this, which is why I always recommend taking a serious and close look at Budget Maestro by Centage Corporation .  This is because the application uses the above-mentioned approach of transaction based forecasting.  To me, this software is a clear innovator and quite possibly a game changer.

Using this software, cash, always the company’s lifeline, can be forecasted with a greater degree of confidence, way in advance of cash crunches or other crises, allowing corrective measures and important decisions to be made when there is still time to rationally make them.

As the author of the above referenced article says, cash audit work should be left to senior personnel because of its great importance.  Using our Budget Maestro software example, forecasting of cash (and all other balance sheet accounts) should only be done by purpose build software, specifically designed to do that.

An added bonus, among many other things, is the fact that forecasting cash does not involve any grunt work.   With Budget Maestro, these tasks are performed quickly, automatically, completely and accurately.

Leave a Reply

Your email address will not be published. Required fields are marked *