Five Common Sense Steps to a Better Cash Flow Forecast

1. One-size does not fit all.


It is tempting to devise a forecast template that has the same structure for all your subsidiaries. After all, it will make your life easier if you consolidate the data. However, this ignores the fact that not all of your subsidiaries are the same. They might operate with different business models, in different regions, with different business sizes and different time horizons for their forecasts. To ignore these realities is a sure recipe for a low-quality cash flow forecast.

Instead, you need to invest time at the beginning of the project to find out at which level of granularity your subsidiaries can provide a cash flow forecast and which time horizon works for them. The insights you will gain will enable you to provide a forecasting template that is accepted by the subsidiaries and which they can actually complete to a high quality. However, you need to keep one thing in mind – while it is a good thing to take the concerns of your subsidiaries into account, you still need to find similarities between them. This way you might end up with a couple of different templates, each to be used by more than one subsidiary. You should not end up with one template per subsidiary.

2. Allow Excel – ban email.

If you spend time with your subsidiaries, you will quickly find out that in many cases they already have Excel sheets where they are preparing their local forecasts. This is a good thing! It shows that they are already cash-minded and that they have understood the benefits of preparing a forecast. This is also exactly the data you want to get your hands on.

However, you do not want to receive dozens of emails with all these different Excel forecasts. Instead, make sure that your cash flow forecasting system allows to either copy and paste directly from Excel, or that it has an import functionality. This way you avoid double work and reduce input errors by your subsidiaries. You will also increase the acceptance for the forecast as such.

3. Validate as early as possible.

Deviations between different forecasts can and will happen. However, it is a crucial point for the success of any forecasting system at which step in the process the deviations are detected and commented on. You should not be the first in the process to conduct validation of deviations. Instead, all the validations that you are doing should already be carried out by your subsidiaries as well. In the best case, all of the validations will be performed before the numbers are submitted to you.

This approach has two benefits: Firstly, if a subsidiary made a mistake leading to a high deviation between the current and previous forecasts, it can be corrected before the final numbers are submitted to you. Secondly, if a deviation exists for a good reason the subsidiary can provide an explanation.

This way, fewer mistakes will end up on your table and deviations that have a functional reason are already commented on, thus saving you the time it would take to get in touch with your colleagues.

4. Provide data at all costs.

Every forecast contains a number of items that already exist in another system. Examples are the starting position of your forecast (your bank balances), cash flows from treasury deals (such as loans, deposits or FX transactions) and flows for the short-term forecast that can be gathered from your enterprise resource planning (ERP) system. Before asking your subsidiaries to complete a cash flow forecast, you should conduct a detailed analysis to find out which of the items mentioned above are already available to you and hence can be provided to your subsidiaries in advance.

Subsidiaries are usually not sitting around waiting to perform another task for one of the central departments. When you show them that you are making the effort to provide as much information as possible for their forecast beforehand, you not only respect their time-budget, you also ensure a better quality of forecast. This way you show that you are willing to contribute time and money to achieve a high-quality forecast and in turn, you can ask your subsidiaries to do the same thing for all items they are in charge of.

5. Give feedback.

Once the forecast is complete, you will analyse it and take actions based on it. One of these actions should be that you give feedback to subsidiaries about their cash flow forecast. Elements of this can be automated. You could send out a set of reports to the subsidiaries showing the cash flow forecast and any deviations. However, if you encounter large deviations, you should pick up the phone and discuss with the subsidiary if and how the forecast could be improved.

The conclusion might be that due to the nature of the business, the forecast will always be fairly volatile. It could also be that you need to provide cash flow forecasting training to this subsidiary, or one of multiple other reasons. However, this is not the main point of giving feedback, which is that the subsidiaries are not reporting to a “black-box”. Instead, they should feel as though someone is actually looking at their numbers and has questions about them. This will raise the importance of the whole topic and will ultimately result in a high-quality forecast.

Conclusion

None of the five steps outlined is hard to implement and most cash flow forecasting systems provide the technology required to do so. However, each one of these steps needs time and a good working relationship with your subsidiaries. Ideally, you will choose a forecasting system that is so easy and flexible to use that it will free up some of your time – which you then can invest to build up the relationship with your subsidiaries.

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