Cash Forecasting: The Need for Speed

In a recent study conducted by Reval, over 70% of corporate treasurers in Asia Pacific who responded reported that it takes them at least a day to get their cash forecasts. However by the time treasurers can collect information from global subsidiaries, account balances and cash flows may already have changed; potentially invalidating investment or funding decisions. Treasurers, then, are regularly using outdated information to determine liquidity positions and make hedging decisions. This is especially problematic in a dynamic business environment where volatile markets impact exposures and hedge effectiveness. However, the right treasury technology can enable treasurers to calculate cash forecasts in minutes for real-time insights into liquidity and related risks.

Reval´s research showed that the majority of treasurers in Asia Pacific are managing cash forecasts by passing spreadsheets across the business, which is impacting the timeliness of their forecasts. Comprehensive and integrated software-as-a-service (SaaS) solutions for treasury and risk management (TRM), however, provide treasurers with the ability to gain an overview on liquidity and related risks in real-time. When replacing spreadsheets with single-version SaaS TRM solutions, treasurers will be able to accelerate cash forecasting in four areas:

Multiple Cash Forecasts: The simplest and fastest cash forecasts would have two lines: total payments from and total payments to suppliers and employees. But in general, treasurers would plan more granularly in order to better control liquidity, spending more time on cash forecasting.

Ideally, treasurers use a set of daily, monthly and yearly cash forecasts in parallel. The sheer number of plans needed could make it unwieldy for treasurers to use spread sheets; however, TRM solutions make it possible to manage hundreds of plans simultaneously in a structured way.

Data Collection: Typically, cash forecasts comprise operational cash flows, financial cash flows and investments collected from a multitude of different sources such as such as bank balances, enterprise risk management (ERP) solutions, business plans, sales forecasts, accounts receivable (A/R), accounts payable (A/P), treasury and payroll.

When applying an integrated TRM solution, data collection – the hardest to control – becomes the easiest and fastest. With a TRM solution, data from other systems and bank partners is fed automatically into the cash forecast. Where automation is not possible or not desired, SaaS technology provides cash managers in global treasury centres with secure and user-friendly web access to enter, for example, cash balances or planned investments into the forecast.

After all predictable data has been incorporated into the cash forecast, treasurers typically use statistical methods to forecast missing data based on past cash cycles. For long-term planning, as an example, salaries would be predicted based on the past year´s payments considering expected staff growth. Once set up, routines will populate liquidity plans automatically as well.

Market Data: Multinational corporations (MNCs) will plan liquidity in different currencies. Treasuries need the ability to effectively express forecast in a variety of currencies, functional and operational and to understand the impact of movements in exchange rates.

Relying on outdated rates in spread sheets could be very expensive, causing negative balances, wrong investment or funding decisions or hedge ineffectiveness. In contrast, TRM solutions on SaaS technology are able to automate valuations and currency conversions through integrated, real-time market data feeds. While cash flows from subsidiaries will be converted from local currency to the enterprise currency automatically, corporate treasurers are able to analyse cash positions and exposures by currency through their treasury platform´s dynamic dashboards

If currency rates affect hedge strategies, new hedges can be designated easily in the TRM solution. Furthermore, workflow control and documentation supports treasurers in hedge accounting and compliance reporting.

Cash Views and Risk Analyses: Commonly, subsidiaries produce their own cash forecasts. Although spread sheets can be linked to generate an enterprise-wide forecast automatically, it is not a bi-directional solution. It is not possible to go back from the global cash forecast to the individual subsidiary´s liquidity plans and cash positions. With TRM, data aggregation and drill-down capabilities are provided, making it easy for treasurers to gain visibility in global and local cash positions.

After forecasts have been checked against actuals and the opening cash position has been reconciled, ideally through automated rules, it’s time to run scenarios in the TRM solution to identify risk drivers and understand correlations between them. The value of more timely cash forecasts is the ability to provide analysis and simulation capabilities.

TRM solutions provide the ability to compare plans with actuals and budgets at all levels of the organisation. Furthermore and possibly more importantly, treasures want to stress test and simulate the impact of market movements on the liquidity and their hedge strategies. For example, finance professionals would want to understand the implications of interest of FX rate changes and the impact of seasonal changes in receivables on the company’s liquidity. Other simulations might include analysing shocking large inflows or outflows on the forecast to assess the impact of uncertain market conditions, such as a banking crisis or sovereign risk, on liquidity and risk.


Finally, advanced analysis such as Cash flow at Risk (CFaR) allows treasurers even deeper insights into liquidity risk. What CFaR offers beyond common stress testing capabilities is the ability to incorporate correlation assumptions across multiple simulations to establish mean, worst case and best case outcomes. A comprehensive CFaR solution will simulate as much as 2,000 cash flow outcomes per transaction, considering the potential offsetting impacts across the portfolio to show a net cash flow outcome at differing percentiles of confidence. Consequently, treasurers responsible for managing the cash flow risk can easily identify the core drivers in their risk profile and the correlations between risks to determine the acceptable level of exposure for their organisation given the simulated outcomes.

An old adage that still holds true is ‘garbage in is garbage out’. Automation and integration of processes are the keys to effective and strategic cash forecasting. By implementing real-time data and integrated analyses provided in a SaaS-based TRM solution, treasurers can increase speed and planning quality and gain a holistic understanding of liquidity and risk for better strategic decision making.


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