“In an uncertain economy fraught with unprecedented inflation, understanding and scrutinizing cash flow through forecasting is a must.”-Deloitte Report

Today’s economic climate is uncertain. Businesses are facing stormy challenges. For example: decades-high inflation, declining consumer demand, rapid interest rate hikes, and geopolitical tensions disrupting global markets. These issues, when combined, create a perfect storm of unpredictability. For businesses to survive and thrive, the focus must shift to their most valuable resource—cash.

Cash flow is more than a metric; it’s a lifeline—and liquidity/cash forecasting is now a strategic imperative. Companies must understand not just where they stand today but where they’ll be tomorrow, and this requires more than guesswork. It calls for a structured approach to forecasting that brings transparency, collaboration, and insight across all levels of the organization.

Cash Flow Forecasting: From Back Office to Business Essential

Historically, cash flow forecasting was seen as the responsibility of finance or treasury departments. It was a niche task for managing short-term liquidity or responding to crises. But in the face of economic turbulence, this perception has radically shifted. Forecasting has become a core part of strategic decision-making, integrated across departments and essential for navigating uncertainty.

So why the shift? The answer lies in understanding how cash connects every aspect of a business. Every operational decision—from extending payment terms to adjusting inventory levels—has a direct impact on liquidity. Yet many companies operate in silos, where departments make decisions without visibility into their financial implications.

For example, a sales team might push for volume growth by offering extended credit terms to customers, while the collections team focuses on improving payment cycles. Without alignment, these goals can clash, creating liquidity strains. Cash flow forecasting bridges these gaps by showing the ripple effects of decisions across the organization.

Governance: The Unsung Hero of Liquidity Management

Effective cash flow forecasting is about more than just numbers. It’s about governance—a structured framework that promotes alignment, collaboration, and accountability. Companies that excel in liquidity management build their forecasting processes on three foundational pillars:

1. Executive Sponsorship: The Power of Leadership

Strong governance starts at the top. Finance leaders must champion the importance of liquidity management, communicating its purpose and value across the organization. This requires more than sending memos or holding occasional meetings. It’s about fostering a “cash culture” where every functional leader understands their role in managing liquidity.

For example, executives should clearly explain why cash flow forecasting matters—not just as a financial exercise but as a strategic tool that supports growth, stability, and resilience. By aligning the organization around a shared vision, leaders can ensure that forecasting becomes an integral part of decision-making.

2. Functional Alignment: Breaking Down Silos

Forecasting is not a finance-only activity. It requires input from multiple departments, including sales, procurement, supply chain, IT, and collections. Each function has a role to play in managing liquidity, but misalignment can create inefficiencies and conflicts.

Take the case of a procurement team negotiating favorable payment terms with suppliers while the accounts payable team accelerates payments. This disconnect, often rooted in a lack of communication, can erode working capital. A well-structured forecasting process brings these teams together, fostering collaboration and ensuring that decisions align with broader liquidity goals.

3. Regular Cadence: Turning Insights into Action

Governance thrives on routine. Companies that excel in forecasting establish regular meetings to review cash flow projections, analyze variances, and identify areas for improvement. These discussions are more than just check-ins; they are opportunities for functional leaders to share insights, address challenges, and drive accountability.

One key advantage of this approach is its ability to build trust. When leaders understand the mechanics behind forecasting tools—how data is collected, assumptions are made, and insights are generated—they are more likely to buy into the process. This transparency transforms forecasting from a top-down directive into a collaborative effort.

From Analysis to Action: The Role of Scenario-Building

In uncertain times, even the best forecasts can be disrupted by unexpected events. That’s where scenario-building comes in. By modeling different outcomes, companies can better understand how various factors—such as declining demand, rising costs, or supply chain disruptions—will impact liquidity. This proactive approach allows organizations to prepare for both opportunities and risks.

A Real-World Example: The COVID-19 Pandemic

Consider the early months of the COVID-19 pandemic. Many companies faced a sudden and unprecedented drop in demand. Customers delayed orders, stretched payment cycles, and renegotiated contracts. For businesses without robust liquidity planning, this created significant challenges.

Those with strong forecasting processes, however, were better equipped to adapt. By incorporating input from sales, procurement, and collections teams, these companies were able to:

• Adjust sales forecasts to reflect shifting customer behavior
• Reduce supplier orders to prevent excess inventory
• Decrease indirect spending in line with lower revenue expectations
• Address slower payment cycles through targeted collection efforts

This end-to-end collaboration didn’t eliminate the challenges but helped mitigate their impact. Scenario-building gave leaders the confidence to make informed decisions quickly, preserving cash and stabilizing operations.

Transparency Unlocks Insights

One of the most significant benefits of cash flow forecasting is the visibility it provides. By analyzing actual and projected cash flow variances, companies can identify not only where they’re falling short but also why.

For example, imagine a company that consistently misses its cash flow targets due to early vendor payments. On the surface, this might seem like a minor issue. But a closer look reveals a deeper problem: the accounts payable team is paying invoices 10 days early, despite having 30-day payment terms. This process inefficiency, once identified, can be corrected to improve liquidity.

Such insights often go unnoticed when companies rely solely on high-level metrics like Days Payable Outstanding (DPO) or Days Sales Outstanding (DSO). Direct cash flow forecasting digs deeper, providing granular visibility into disbursement patterns, payment categories, and vendor behavior. This level of detail not only improves forecasting accuracy but also identifies opportunities for process improvement.

Empowering Leaders Through Goals and Collaboration

Governance isn’t just about structure; it’s about purpose. Defining clear goals upfront gives functional leaders the direction they need to streamline processes and drive better outcomes. For example, a company might set goals to:

• Improve forecast accuracy by 10%
• Reduce working capital requirements by optimizing payment terms
• Increase collaboration between sales and collections teams to align credit policies with liquidity needs

These goals are not static. As business conditions change, so too should the focus of the forecasting process. Regularly revisiting and refining objectives ensures that the organization remains agile and responsive.

Why Governance is the Key to Liquidity Success

Companies that approach cash flow forecasting as a purely financial exercise risk missing its true value. The power of forecasting lies not just in the numbers but in the conversations it sparks. By bringing functional leaders together, fostering transparency, and promoting accountability, organizations can:

• Bridge gaps between departments
• Identify and address process inefficiencies
• Improve predictability in cash flow management

The result is a more resilient organization—one that can navigate uncertainty with confidence and seize opportunities for growth.

Conclusion: Building a Foundation for the Future

Effective liquidity management starts with strong governance. By investing in the foundational elements of cash flow forecasting—executive sponsorship, functional alignment, and regular dialogue—organizations can create a process that is not only reliable but also sustainable.

This foundation provides the insights needed to weather today’s challenges while preparing for tomorrow’s opportunities. Whether it’s adapting to economic turbulence or optimizing day-to-day operations, cash flow forecasting is more than a tool; it’s a strategy for success.

Source links:

1. Deloitte: understanding and scrutinizing cash flow through forecasting (link)