Cash flow forecasting is essential for strategic planning and decision-making and comes with many benefits. Normally, it’s unnecessary to list all the benefits of cash flow forecasting – treasury and finance professionals understand them.
If you want to reap the full benefits of cash flow forecasting, this guide on best practices is for you so that you maximize the accuracy and efficiency of predicting cash flows.
So long, Spreadsheets!
The problem is that many still use Spreadsheets for cash flow forecasting. It may seem to be easy to work with Spreadsheets since you’ve got used to it and you’ve developed your processes. But there are a few challenges with using Spreadsheets.
Stating the obvious: it’s time-consuming. First, you need to pull the data from many different sources, like ERPs or bank accounts. If you have subsidiaries in different time zones that can even delay the timeliness of the report. You deal with several banks, currencies, and you need to rely on local people’s know-how.
Data integrity is a primary concern too. When you are pulling the data from various sources, you must make sure that all the data is correct and it’s in the right format.
Of course, Excel does the job just fine and most likely you’ve already known the struggle of cash flow forecasting with Excel.
Cash flow forecasting to optimize cash buffers and notice cash shortfalls
When you improve cash flow forecasting, you will be able to optimize cash buffers and realize cash shortfalls.
According to the recent Forrester study, about 70% of decision-makers have found cash flow transparency, flexible reporting, and data collection challenging
To enhance your cash forecasting, we suggest that you consider the following best practices.
Cloud-based software solutions help to automate your cash flow forecasting. Yet, this is one of the pitfalls of many cash forecasting efforts. No wonder that 47% of the decision-makers we’ve asked in the Forrester commissioned study answered that they are going to invest more in automation as they expect automation to deliver improved cash allocation and increased forecasting accuracy.
Some would probably suggest enhancing your existing systems for improved efficiency; however, such undertakings can be enormous projects, both time and money-wise.
Easy plug-and-play connectivity and integrations with multiple ERP systems and treasury management systems can improve how you receive the data for your cash forecasting.
When you connect with banks through host-to-host, SWIFT, or local connectivity alternatives, you will be able to get an overview of all the bank account balances in a single place.
Consistent reporting: have a plan and stick to it
This is perhaps a no-brainer for most, but it’s essential that you remain consistent with reporting. Make sure that you have a plan on what you will improve in your cash flow reports and you stick to the plan.
Sometimes there could be a need for an immediate report on the company’s liquidity position across multiple subsidiaries, banks, or currencies. Consider having these reports up-to-date. Make sure you also have accurate data on cash inflows and cash outflows.
Short-term, medium-term, long-term cash forecasting
Focus on both short-term and medium-term forecasting and have reports done daily, weekly, and monthly basis.
Short-term typically means 30 days, including daily and weekly views and it’s essential for executing daily investments and funding actions.
Medium-term is normally reported monthly, up to one year. This can help with optimizing the duration of investments, hedge maturities, and minimizing funding mismatches.
Long-term forecasting is critical for businesses for planning, budgeting, strategic investments, long-term funding decisions. When you have accurate short and medium-term forecasts, it’s easier to recognize trends and patterns and predict the long-term cash positions more precisely.
Forecast variance review
Comparing actuals vs. projected cash flows and analyze them daily should be part of your plan. If there are large variances make sure you investigate and escalate the issue so that you can improve the quality of the forecasts. Technology can help with this practice as well.
How to put cash flow forecasting best practices into use?
Putting these best practices into use can be quite simple with the right tool. Cloud-based cash forecasting solutions can be easily connected to your existing systems and bank accounts so that you can check off some of the items from the list above. With the modular approach of the existing solutions, you can use only the tools and solutions that you absolutely need without needing to do any changes in your original source systems.
When you follow these best practices, you will have the analytics that’s necessary to discover trends and patterns and help you in the long term.
Additionally, your forecasting efforts will be more effective and you could also increase the accuracy of your short and medium-term data.
As the result of COVID-19, many have started to improve their cash management capabilities and they are increasingly digitalizing and automating their processes. Cash forecasting has a prime focus in the improvement plans because when the next unexpected event hits, organizations want to be ready and have the most accurate information on their cash position such as liquidity balances, cash movements, and business transactions.
Have you found this article resourceful? Get your copy of our 'Successful Businesses Excel At Cash Management' study from Forrester Consulting commissioned by Nomentia: