Best Practices to Increase Effectiveness of Cash Forecasting

A challenging economy has elevated the value of cash forecasting in the business world, with senior management more intent than ever on having a strong handle on projected liquidity. Unfortunately, another consequence of economic weakness is that it can make forecasting accuracy more elusive.

In fact, the lacklustre economy businesses have experienced in recent years can dramatically impact cash flow. Collections have become less predictable as businesses struggle financially, often leading a company to tighten credit terms and possibly forfeit some sales revenue. Meanwhile, investment returns may shrink, and business woes can require a company to reduce cash balances and delay outgoing payments. All of these considerations impact cash forecasting.

Forecasting Hurdles

Most companies develop short- (up to a year), intermediate- (12 to 36 months) and long-term (three to five years and beyond) cash forecasts. Their accuracy depends on three factors: human resources, data and forecasting tools. Of those factors, the biggest challenges usually relate to the data and tools. This is particularly the case in a decentralised organisation where gathering all of the data necessary for accurately projecting cash is a massive undertaking. In these situations, financial managers can spend so much time collecting data from multiple sources that they have very little time to actually analyse it.

In addition to the logistical issues associated with gathering the right information, some financial managers continue to use spreadsheets and simplistic linear regressions to generate forecasts. While not necessarily wrong, managers may find that they are much better served using cash forecasting tools built into their companies’ enterprise resource planning (ERP) systems, which take into account more than historical cash flows.

What’s a Company to Do?

The following steps have been designed to help companies increase the effectiveness of their cash forecasting:

Create a central repository for forecasting data

Due to extensive merger and acquisition (M&A) activity over the past decade, many companies now have multiple reporting systems. To forecast effectively, a company needs to regularly pull all relevant data into a central repository.

Once a company fully automates its processes, its banking partner can provide an electronic cash management balance or BAI2-formatted transmission file that includes all of their previous-day account information. With that information, managers can centralise all their data into one system without having to log into their bank account online.

Document the reasons for variances

Forecasts, particularly in this environment, can be off target. Managers need to document why their forecasts are off, and partner with other members of their organisation to ensure they receive relevant information that impacts their forecast, such as new hires that will affect both sales and expenses.

Be willing to re-evaluate and revamp your cash forecasting system

This step is particularly important when you start exceeding a standard acceptable level of variances. A standard deviation of plus or minus 2% will mean a forecast is off by 14%, a point that will have significant impact if left as is. Taking the time to re-craft your forecasting system and employ more analytical tools is key.

Find the right treasury management partners and services

By taking advantage of new services like electronic payables and receivables solutions, cash managers can enhance cash flow and better meet cash forecasting targets. A conversation with the treasury management expert at your bank can help identify the most effective tools and services for your company’s particular needs.


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