Cash Forecasting – Is it Worth it?

The role of a treasurer can be compared to that of a chef in a gourmet kitchen. To be successful in preparing an exquisite meal, the chef will require tools, such as a kitchen with all the appliances. A chef also will require some knowledge, talent and experience, as well as quality ingredients. To be successful, a treasurer will find himself in a similar position, whereby the tools are the products traded in the financial markets. Knowledge, talent and experience are as essential to the treasurer as they are to the chef, and the ingredients consist of current and future cash.

Current cash is easy to determine. A look at your bank statements basically tells you what the current cash position is. Managing your current cash position is not quite as straightforward as it was a few years ago, but still remains relatively easy provided you have sufficient market liquidity and a clear policy to follow. However, the problems begin when you start looking at future cash. The only thing you know with some certainty is that whatever your cash forecast tells you will be wrong. So why bother?

There are three crucial sets of stakeholders who will all have a founded interest in a regular up-to-date and accurate cash forecast. These are external partners, internal partners and yourself as treasurer.

Let’s look at these three groups more closely. The main external stakeholders are your banks, rating agencies, your shareholders and other investors. Today, with credit being so tight, banks are looking at future projections closer than ever and the quality of your cash forecast is likely to play a significant role in their decision whether or not to extend credit lines. The same applies to rating agencies. These have been criticised in recent months for being too slow to react. You can expect them to show even more interest in your future cash than they have in the past, and they will use the information you provide to them as a basis for their rating of your company. Quarterly investor calls are all about the future, too. Analysts, shareholders and your bondholders want to know what the outlook is and gain sufficient confidence in the management of the company. They do not like surprises and are looking for transparency, consistency and accuracy in your outlook.

Foremost among your internal partners will be the chief financial officer (CFO). I doubt whether there is a CFO around who has not realised that cash is one of the most – if not the most – important factor he or she has to understand and have a handle on. It is generally the CFO who will communicate everything about the firm’s cash position to all the external partners mentioned above, and your CFO has every right to expect timely and accurate cash forecasts from their treasurer. But also expect other internal partners, such as controllers, economists and even operating units, to be interested in the future cash development of the company. And this interest should be viewed as encouraging, as it demonstrates how internal partners can work together closely and appreciate each other’s requirements.

Whereas it may sound obvious that you as treasurer have a strong interest in the cash forecast, I would like to categorise treasury as a vital stakeholder. Cash forecasting is not an exercise as an end in itself. You should be using the data to determine and manage your short-term liquidity, foreign exchange (FX) and interest rate exposures. Financial risk management is a key responsibility of a treasurer and they will require a reliable forecast in order to manage these risks effectively. A recent survey reported that treasurers felt that their top challenge in FX management was the difficulty to quantify their exposure. A high-quality cash forecast can help.

Now that we have determined that there are quite a number of groups with a vested interest in the cash forecast, you may ask the question: Why the treasurer? Don’t we have many economists or controllers in the company with wizard software tools who can produce any number on any activity your company does? Yes, and these colleagues provide very valuable work. You can also use their figures for some of your longer-term cash forecasts. But there are two areas where you will run into trouble if you use their numbers only.

First, most companies set their budget or official forecasting numbers once annually or, at best, every quarter. Increased volatility in exchange rates and commodity prices means that these numbers will become outdated and inaccurate after a few weeks. The second problem lies in the description of cash flow. Economists will focus more on the financial statements and, depending on the accounting standards being used, may have items such as depreciation included in the cash statement, while items such as tax payments may be excluded. This can indeed be very confusing, but as a treasurer you will probably want to know what is ‘real cash’ or what money will hit your bank account.

The next questions you should ask is what time span the forecast should cover and how frequently it should be prepared or updated. I am often surprised that many companies match their cash forecast to the actual calendar year. That may be all right if you are in January or February, but the further into the year you get, the more useless the forecast will become. Preparing a 12-month forecast itself is probably a good starting point, but if it is to have any value it should be a 12-month rolling forecast. Ideally you may want to forecast for periods beyond 12 months, but this may be too ambitious, at least initially. There is no clear answer to the question of how often it needs to be updated, but my recommendation would be that it should be done at least once a month. Only regularly and frequently prepared forecasts will provide you with a sufficient level of accuracy to manage your business effectively.

You have now set the parameters as what you want to forecast, but obtaining the right numbers still remains a substantial task. Very few treasurers will have sufficient insight into the business to be able to produce the numbers themselves. It will therefore be necessary to engage planners or other colleagues from the business or operating units. Whereas this is often viewed as a challenge, I consider this to be an opportunity. Engaging with the business is the best way to establish and expand internal relationships. I have found that holding a workshop with the planners to be extremely useful. You can explain what you need and why you need it, and they can explain what their concerns are, giving you a better understanding of their business and an opportunity to work together to identify risks and find solutions. You probably want to provide the planners with a standard spreadsheet or other simple tool with which they give you regular cash updates.

But the most important part of the exercise is to make everyone involved in the process accountable for the numbers they deliver. If possible, the quality of cash forecasts should form part of the planners’ performance scoring. This may meet with resistance, but you should be able to convince the business unit leaders of the importance of cash forecasting and they should pass this message on to their teams.

As treasurer, you will then be accountable for the consolidation and analysis of the forecast. Again communication is key to success. You should report back to the planners, providing them with feedback on the quality of their forecasts, asking questions about deviations and providing an analysis of how their forecasts influence your decisions and strategy as treasurer. At the same time you should avoid being overzealous. Actual cash flows will never match 100% with forecasts and you do not want to waste time tracking every dollar. As treasurer, you must decide what level of accuracy you need and where deviations are tolerable or not.


To summarise, cash forecasting is a very worthwhile process, as the numbers can influence the company’s outlook, strategy and results. But it is also imperative that the forecasts are of adequately high quality for the CFO and the treasurer to rely on. The best method of ensuring that that level of quality exists is for treasurer to take ownership of the forecasting process from the outset. This may sound daunting, but other opportunities such as increased understanding of the underlying business, enhanced relationship-building and an increased awareness of treasury and the value it brings to the organisation should evolve from doing so.


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