Cashflow forecasting and getting it right is a real art. When you have more than one company in the mix, the complexity increases naturally. This is when you need to create a consolidate cashflow statement and forecast. Business owners cannot gauge runway for cash held or maintain a good treasury function unless they get into good forecasting habits.
Start where you're at
There's no perfect place to start. If you don't have software that produces cash floe forecasts on a consolidated basis (Eg - Fathom, Spotlight), use a google sheet. A google sheet is better than excel simply because real time save can happen on it and collaboration if needed is easier.
When capturing cash movements in a group, eliminate cross company movements. Eg: A parent loans cash to a subsidiary, you can eliminate that. Consider any exchange rate losses/gains however as it could be significant for large movements.
Cash outgoings are for the group
When you don't have a central finance function that has visibility of expenses across a group of companies, you'd likely miss outgoings, That's simply because most of time, you're focussed on that group company that has the most volume of payments. The payments, however small made from less active subsidiaries and related companies can spiral and cause imbalances in your cash planning.
Specific emphasis here on taxes.
Depending on jurisdictions, different companies in the same group may end up having varying VAT / sales tax or corporation tax payment dates. Adding that to a consolidated cash flow would help determine the amount of cash needed in a particular company at a particular time.
This is long winded when done manually. If all of your group companies use the same accounting software, it's easy to get a consolidated report that provides a group view using the right reporting software.
Adjustments under tax laws for group companies
Inter-company adjustments that may be important under tax laws of specific
jurisdictions is another area to be careful of. When a parent provides a loan to a subsidiary for example, some jurisdictions would attach an implied interest on it under transfer pricing rules. In certain cases a physical movement of funds need to happen to fulfil this obligation before the company's financial year end.
Without plotting this out on a cash flow forecast, it can be easily missed and can lead to non-compliance.
Use the right tools to save time and cost
In a survey conducted by Amex and published in April 2023, they found that 50% of small businesses believe cash flow management tool consolidation positively impacts profitability. The time that can be saved using the right tool is huge. A finance department spends hours of their time monthly to produce a right fit cash flow statement. Using a good tool can not only save this time but the loss of resources and therefore costs associated with man hours.
A consolidation software can also present the facts more clearly as they have the capability of inbuilt reporting templates.
Dividend pay outs for the group
For group companies, dividends are declared from the parent company essentially once or twice a year. Before the Management decides on the dividend pay-outs, they'd critically analyse the cash position of the group. Unless group level cash position can be reliably estimated for the year-end it's very hard for the Management to determine a pay-out level. They would also need to see cash requirements for the ensuing quarter and possibly the year to be able to ensure there is enough cash preserved before a dividend id declared and paid.
Cashflows are a critical financial metric and one that's aggressively sought by investors and other stakeholders. Once you start the process of forecasting cash consistently, decision making becomes faster and more effective. You are relying on accurate information to be able to drive those business decisions.
Check out our youtube channel for short videos that talk about a few hacks relating to cash flows for SMEs.
Notes and references