TLDR: Forecast the rest of the accounts on the balance sheet, and use cash to make the balance sheet balance.
The first rule of Fight Club is don’t talk about Fight Club. Similarly, the first rule of forecasting cash is not to forecast cash.
Context
The controller calls the CEO to say the cash forecast was off by $1m. I’ve experienced this kind of miss as the beginning of the end for a company.
Insight
Having built financial models for hundreds of businesses since 1999, and having looked at thousands of financials and forecasts from emerging consumer brands as a 📝Credit Committee member of 📝Assembled Brands since inception, I can confidently say:
Most people make financial models that try to forecast cash by starting with the income statement.
I imagine people make this mistake because they don’t really understand balance sheets.
To avoid this mistake, the 📝Integrated Financial Model (IFM) process doesn’t try to forecast cash. Instead it forecasts every account on the balance sheet and uses cash as the plug.
Why it's obvious once you realize it
Most accounts on a company’s 📝General Ledger only interact with one or two other accounts. The cash account interacts with every account on the general ledger.
Because the cash account interacts with every other account, it's folly to try to forecast it without forecasting every other account first.