There are 4 important components of the cash forecasting process which play a critical role in making the process faster and more efficient.

Approach – Art vs Science – The approach in which the cash forecasting is done defines the accuracy of the forecasting. So it is important to define and have an approach based on the type of cash forecasting you do. There are essentially two main types of cash forecasting methods – direct or indirect.

• Direct cash forecasting is a method of forecasting cash flows and balances for short term liquidity management purposes, typically less than 90 days in duration.
• Indirect cash forecasting is often longer term in nature and it relies on various indirect methods of building up a cash forecast such as using projected balance sheets and income statements.

Data Gathering –

• When creating cash forecasts, treasury must rely upon a number of different sources. This often involves communicating with multiple departments and staff members internally to obtain the desired information
• If an organization does not communicate well internally, or has an outdated or legacy tech infrastructure, this part of the process may be one of the most difficult

Modeling –Once the treasury team has collected and aggregated all the relevant data, they may create their forecast

• Typically, the treasury has already selected the forecast method before gathering and
  collecting data, as the type/amount of data collected will depend on the forecast method used
• Often, the length of time for the forecast plays a significant role in the type of forecast used The amount of information available for forecasting and the availability of any applications/solutions will also impact the type of forecast utilized

Variance Analysis –

• Variance Analysis involves comparing forecasted cash flows for a given period to the actual cash flows that occur during that period to identify discrepancies and evaluate the accuracy of the forecast
• This process can help identify shortcomings within the forecast and aid treasury in improving the accuracy of their forecasts moving forward

Improving the strength of these pillars can go a long way in building reliable cash forecasts. The following discusses how these are key success factors in building an accurate and reliable forecast.

The maturity of the cash forecasting process corresponds to the effectiveness of the process with respect to the four components. The next chapter explores how the cash forecasting process could be evolved on the four high impact pillars.