Cash Forecasting Overview
Cash Forecasting is the merging of data and treasury strategies to plan and manage corporate liquidity. It is a practice treasurers can utilize to estimate the financial position of an organization over a specified period of time. Cash forecasting is valuable in that it allows treasurers to predict upcoming cash surpluses or shortages, meet company obligations, and manage risk.
Cash Forecasting has become even more important in the current financial environment. Market and Interest Rate volatility make Cash Forecasting a critical tool to reduce risk and exposure. Cash Forecast tools are incorporating new technologies such as AI to make them even more powerful.
Every functional group within a business benefits from a cash forecast. Ineffective Cash Forecasting can lead to poor advice on business decisions. Cash Forecasting tools help improve communication and real time data.
Cash Forecasting Processing – Objectives
Cash forecasting improves short-term liquidity planning, enhances decision-making, promotes growth, and prepares multiple forecast scenarios. Having improved short-term liquidity planning means avoiding last-minute liquidity deficits and surpluses. You can see improved decision-making by being able to better prepare for payments on loans or debt your company takes on.
Cash forecasting can also prepare your organization for planned growth and allow your organization to manage working capital to fund the activities that will help grow the business. Cash forecasting and in particular utilizing cash forecasting tools is beneficial for testing out creating multiple forecast scenarios for different time periods, objectives, and uses.
Cash Forecasting Process Work Flow – Infographic
Cash flow forecasting requires a treasury professional to take the following essential steps:
- Establish assumptions
- Estimate future cash inflows and outflows
- Generate a pro forma cash position
- Identify how to finance cash deficits or invest cash surpluses. We measure the shortfall or surplus relative to the predetermined, minimum desired target cash balance.
- Review the forecast against actual results and revise the forecasting process as necessary
Cash Forecasting Best Practices
There are a few best practices to consider when it comes to cash forecasting. First, it’s important to ensure you’re defining the end goal of a cash forecast. Determine the time and effort needed before attempting the desired forecast. Though it might be difficult to determine the exact time and effort needed to complete a forecast, having a close estimate will ensure that you’re using time and resources efficiently.
Capturing accurate data is key to producing accurate forecasts and estimates. Communicating with teams and stakeholders alike that produce the data you’ll be utilizing will improve your forecasts and lead to better results.
Optimizing your cash visibility is the lifeblood of any organization. Again, coordinating with teams and key stakeholders to increase cash visibility is key. After completing forecasts, reviewing the accuracy of past forecasts with actual results will help ensure your forecasts are achieving their desired goals.
Having both short-term and long-term forecasts is recommended and will help you perform forecasting on a daily, weekly, and monthly basis to ensure optimization. Taking advantage of automation when possible is also recommended, as it can help you to consolidate and gather inputs automatically, which will improve accuracy and provide increased efficiency for cash managers.
Utilizing statistical analysis of your historical data will provide a realistic mapping of where a company was, which should be used as a baseline for forecasting. Our final best practice recommendation is to keep it simple. Balance precision with effectiveness, make sure to only use required data, and ensure that the reports you provide are user-friendly.
Cash Forecasting Participants and Stakeholders
Those invested in an organization’s cash forecasting efforts should be involved in the cash forecasting process. Sales and Marketing departments can assist in gathering and scrutinizing sales information for patterns and anticipated costs, thereby enhancing the precision of forecasts. Accounts Receivable (AR) and Accounts Payable (AP) departments contribute to cash forecasting by offering predictions about the sum of money a business is expected to either receive or disburse over a specified duration.
Product managers should be involved in cash forecasting due to things like manufacturing costs per unit (fixed and variable costs), logistics, distribution, and transportation costs (including warehouse and inventory expenses). Treasury departments serve as the key decision markers regarding how to allocate resources and manage risk.
Cash Forecasting Roadblocks
Oftentimes, organizations face certain roadblocks when it comes to forecasting. One of the key things to make sure not to overlook is the presence of seasonal trends in forecasting. Depending on the time of year you’re forecasting for, your organization may need to consider what fluctuations in expenses and sources of revenue you can expect.
Incomplete or inaccurate data, limited viewpoints, lack of communication, and uncontrollable external factors are also potential roadblocks to be aware of. Having these potential roadblocks on your radar will help ensure that you’re able to work to proactively overcome them.
The importance of cash forecasting cannot be overstated. With some time and effort, the benefits of having an efficient, robust cash forecasting engine can easily be realized. No matter where your organization is in their cash forecasting capabilities, Elire’s team of experienced treasury experts is here to help.
Reach out to [email protected] to connect with our team or view the recording of “Cash Forecasting in a Changing Environment – How to Utilize Cash Forecasting Tools to Reduce Exposure in Today’s Environment” from the 2023 Elire Treasury experience. This session is password-protected but can be accessed by reaching out to [email protected].