Five tips to help enterprise treasurers become best-in-class in cash forecasting

Why do enterprises need to focus on cash forecasting accuracy?

A survey conducted with corporate treasurers last year by Treasury Strategies Inc. found that improved forecasting capabilities were the top priority for 2020 and were up from second place in 2019 and third place in 2018.

COVID-19 has affected enterprises’ capability to predict their cash flows due to unpredictability. Every enterprise treasurer desires to have a reasonably high cash forecasting accuracy but getting there is difficult due to the operational challenges treasurers face in their daily life.

Challenges faced by enterprise treasurers

• Accurately forecasting payments from customers due to varying customer payment patterns.
• Obtaining quality and timely data from customers and systems.
• Modeling various scenarios into forecasts.
• Performing variance analysis.

The demand for accurate and timely forecasting has increased with the need to maintain liquidity amid market volatility and risk exposures. Treasurers can lessen the effort spent on forecasting cash by incorporating automation for real-time data-gathering capabilities from multiple data sources across various entities, banks, and currencies. The right treasury technology can greatly enhance the ability to update forecasts, in addition to cash forecasting accuracy for the short-term and long-term.

Five tips to improve cash flow forecasting process

1. Identify the purpose of cash forecasting and start with a base rate.

The goal of cash forecasting requires it to be aligned with the company’s cash position and its priorities.

• For cash deficit companies: An effective forecasting method is very vital for the success of a business. A right cash-flow forecast model acts as an early warning sign to a company’s future business health. With the hit of COVID-19 and recent economic tension, many businesses are functioning with a short margin for error. Owning an accurate cash forecast will allow businesses to predict possible cash gaps and bypass missed payments. Cash flow forecasts deliver businesses with the foresight to execute remedial actions. And in addition to providing support to mitigate the impact of a cash shortage, forecasts can also help forecast a surplus.
• For cash surplus companies: Enterprises seldom benefit from having lots of static cash on hand. Forecasting can help pinpoint a potential surplus and allow treasurers to allocate excess cash actively. Regardlessly if enterprises decide to utilize excess cash to create a competitive benefit, businesses should leverage forecasts and put excess cash to work. Scenario analysis can help forecast the effect of specific investments or decisions as enterprises look to allocate excess cash.

Additionally, start with a base rate through the following ways:

• Pinpoint which problems from the past are identical to the current situation for better forecasting.
• Determine the suitable statistics from these similar situations. For example: Determine the project costs and overruns, the timing of delivery, or return on investment.
• Assess which base rates are most informative and almost identical to the current situation, and consider these more elevated than other base rates.
• Merge the base rates found into a general probability.
• Apply the base rates that are assessed and merged, in the final forecast.

2. Adopt automation for both data aggregation and cash forecasting.

Leverage AI and automation to transform the treasury functions and set it up for a long-term win. Treasures should consider digital transformation by leading enterprise value creation and improving overall implementation. Automating treasury functions will enable finance teams to spend more time on high-value tasks, like initiating insights, managing cash and expenses, and tracking investments.

3. Analyze the variance between forecasts and actuals frequently.

Understand if the company’s present condition requires re-forecasting or constant variance analysis and determine the forecasting cadence. Variances are important for an organization’s key performance indicators (KPIs). Most enterprises perform standard variance analysis (spreadsheet-based), but they often do not have the accuracy that the automated cash forecasting system provides.

4. Inculcate the practice of re-forecasting and updating your cash forecasts regularly.

Benefits of re-forecasting and updating cash forecast regularly or weekly:

• improves understanding of customers and suppliers
• Reduces capital expenditure
• Enhances collaboration with other departments (sales, purchasing, accounts payable, accounts receivable, human resources, etc.)
• Provides guidance in making decisions for growth and improving funding

5. Incorporate several scenarios into the cash forecasts to visualize future cash flows.

When multiple scenarios are analyzed, it leads to better visualization of the impact of specific future conditions. This helps enterprises to revise their strategies for overcoming potential risks to their finances. Thus, treasurers should stress test what-if scenarios and incorporate them in forecasts to analyze how their cash balances would look like in cases of those scenarios.

Benefits with HighRadius’s cash forecasting solution

HighRadius cash forecasting solution can help enterprise treasury by providing the following features:

• Scenario analysis: Analyze best and worst-case scenarios and be prepared for cash crunch or cash surplus with the manual override function
• Variance analysis: Drill down into root causes of variance between forecasts and actuals, and forecasts and forecasts, and identify the high variance categories to improve decision-making.
• Best-fit cash forecasting models: Pick the best-fit algorithms and models to forecast different cash flow categories. For example, for complex (difficult-to-forecast) categories like A/R and A/P, treasurers can use AI models, and for easier-to-forecast categories like taxes and payroll, they can use a heuristic model. This helps to build highly accurate forecasts.
• Dashboard view: Visualize cash balances across different categories, subcategories, regions, banks, and entities, and drill down to get better insights.

The need to improve cash flow forecasting has increased as enterprises try to mitigate the effect of rapidly altering financial conditions and make accurate and quick cash flow decisions. Schedule a demo with us to get your hands on the best-in-class cash flow forecasting to maintain healthy liquidity.