A Good Cash Forecast: What is it Worth?

We all know that an accurate forecast is very valuable. We often talk about the benefits in quite general terms, such as opportunity for profit and improved risk management. That these benefits are not analysed further might be one of the reasons why many hesitate and postpone the decision to invest in improved forecasting, whether through improved routines or investments in system support. Could a calculation of the monetary value of a proper forecast make the decision easier? In this article I will try to demonstrate what an accurate forecast is worth. These are merely examples and therefore do not cover all aspects of every cash management situation. However, I think they provide good input for how to calculate a return on investment (ROI) when investing in the forecast process, whether this is done manually on a spreadsheet or whether you are investing in automated system.

Account Structures

To see the potential value of a forecast we first need to go into the concepts of account structures, as most of the value is usually to be found in the management of short-term funds.

Larger corporations normally have some type of pooling arrangement already in place (see Figure 1). Cash pools are an efficient way of improving the net interest and making funds easily available. But corporations with many banks and/or presence in many countries still need to manually manage the funds between the pools. This can be solved with overlay structures in some, but not all, cases and when this is possible, overlay structures are quite costly.

Figure 1: Example of an Account Structure in a Group

Method Management of Pool Funds

If no accurate forecasting is available, many companies take on either one of two approaches in management of individual pools and idle accounts:

  1. Doing nothing and let the funds stay where they are.
  2. ‘Daily’ manual sweeping of funds.

These approaches are, of course, not recommended. A cash manager with a more proactive approach might wonder why on earth someone would use these methods.

The first approach might be used if fund variation is high in the pools and there is no critical lack of funds. As the balances fluctuate with high frequency, the cash manager will not know if the funds might actually be needed in the pool the funds are moved from. Therefore the movement of funds will become costly and might not be worth doing.

In the second approach, companies manage their funds inbetween the pools by sweeping funds on a regular basis, sometimes even daily. Daily sweeping is a costly method of managing cash in a group. The reason for doing this is usually a shortage of funds.

The above approaches are not optimal ways to manage the balances within a group. An accurate forecast will let the cash manager do the balance management in a more proactive way.

What Can a Forecast Change?

If you use an accurate forecast and sweep your funds in a proactive way, you can maximise your net interest at the same time as you minimise the cost of fund transfers. If a group has a reliable forecast and the positions look somewhat stable, sweeping between the pools should be done. A foreign exchange (FX) swap should be used to eliminate the currency risk when sweeping between pools of different currencies.

Figures 2 and 3 illustrate how a company, with the help of a forecast, is able to sweep its funds between pools, thus improving the balance position. Figure 2 shows the forecasted balance before any action has been taken. Three of the pools are overdrawn for some of the time during the period, while at the same time the Danish pool has a substantial positive balance.

Figure 2: Forecasted Balances of Cash Pools (values in €1000)

Figure 3: After Sweeping Funds Via Treasury Accounts (values in €1000)

source: Details

After the cash manager has swept the accounts the positions look completely different. In the example the company has gone from an average overdraft of €3m, to an average of €1m. Note that the start and end positions are identical in both pictures, but the funds have been used more efficiently. How much can you lower your overdraft usage with the help of an accurate forecast?

Management of Short-term Investments

Forecasts can be used for short-term investments in a similar way. Without a proper forecast, overnight deposits might be the only alternative. In this case, funds should just be left where they are. A forecast will enable you to prolong the average short-term investments. Absence of an accurate forecast can also create a situation where a deposit made needs to be cut short. Accurate forecasts will help avoid inefficiency of this nature.

Long-term Funds – Use of Bank Limit

A long-term forecast can be used to support strategic cash investments and funding, optimising borrowing facilities, strategic objectives and FX hedging.

Companies sometimes define how much the ‘minimum liquidity reserve’ should be. In some cases, banks and owners define these targets and deviations from such targets are not accepted. As a result of this, the treasurer might retain too much cash as a precaution. In these cases the savings created by an accurate forecast can be substantial.

Figure 4 illustrates that the company has an unnecessarily high bank limit. The main reason is uncertainty in the amount of cash needed due to bad forecasting. If the forecast was accurate the limit could have been €10-15m lower for the full year. In the forecast for September, the indication was that funds, including the bank limit, would be close to the minimum reserve, but actual liquidity was considerably higher. With an accurate forecast the company would probably decide to reduce the limit.

Figure 4: Example of an Excessive Bank Limit

Risk Management

An accurate forecast is essential for currency risk management. If hedging is done with a forecast as a basis and financial policy states that hedging should be a certain percentage, the only way to meet this requirement would be with accurate cash forecasting. A deviation in the forecast will result in under/over-hedging of the operational cash flows. This will, of course, be an added risk. An inaccurate forecast, or a complete lack of forecast, will surely create a higher number of FX deals to close positions at the end of the period. The ROI for an accurate forecast can, in this case, be calculated by multiplying the amount of less FX dealing with average spreads. Of course, in this case, the improvement in risk management is probably the main advantage.

Why Use a System?

Doing forecasts with spreadsheets is time consuming and associated with operational risk. Table 1 evaluates the cost savings when forecasting using a system instead of a spreadsheet.

Table 1: Forecasting Comparison Between Spreadsheets and Systems


An analysis of your cash management activities and investigation of possible improvements are good ways of finding the economic value of investment in improved forecasting. An investigation of efficiency in the management of cash pools, short-term investments and funding will give you a good basis for forecasting ROI. Even if these examples do not fit your situation exactly, the cases show the significant potential of accurate forecasting in your organisation. A good way to start evaluating the potential value of an accurate forecast for your company would be to examine actual cash flows and cash positions for the past three to six months using the models above. One should also remember that it takes a little bit of practice to calculate an accurate forecast, with or without system support. So my recommendation is not to wait until an accurate forecast is crucial, but rather to do it now.

Using a system can substantially cut the cost of the forecasting process, while also making the forecast more accurate.


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