Best practices for long-term forecasting to improve asset management

Why use long-term cash forecasting methods?

Long-term cash forecasting, often called indirect cash forecasting, is a cash forecasting technique that uses a pro forma balance sheet and profit and loss statement to anticipate cash flows for periods ranging from six months to five years, including investments and borrowing. After removing non-cash charges from net income and accounting for predicted balance sheet modifications, ending cash balances are calculated. While short-term cash forecasting projects when money is going to hit the bank account, long-term forecasts support plans for expansion and hedge maturities.

How to prepare long-term forecasts?

For long-term predictions, the adjusted net income approach is typically utilized. The information needed to create the adjusted net income estimate comes from business budgets. The net income approach tracks working capital fluctuations and forecasts financial needs. The main disadvantage of this technique is that it does not allow for the tracing of individual cash movements, despite the fact that it is an excellent instrument for demonstrating the aggregate impact of fund flows.

Top 3 tips to help improve long-term cash forecasting

1. Identify the objectives of long-term cash forecasting
The following are the objectives of using a long term forecast:

• To maintain financial stability by planning capital expenditures ahead of time.
• To make adjustments and limit risks, understand prediction deviations and dive into the main point of inaccuracy.
• To remove the requirement for a larger cash buffer in order to save money on interest.
• To improve decisions of M&As and investments.

2. Improve forecasting accuracy of long-term cash forecasting
This can be done in the following ways:

• Automate data gathering
• Use AI and machine learning and best-suited models for forecasting
• Capture enough historical data and compare it with the actuals frequently
• Use time-series analysis to capture seasonality and trends
• Practice re-forecasting for improving the forecasting accuracy over time

3. Track late payments and variances

• Split the A/R into various subcategories such as regions, customers, companies and drill down into the historic data to analyze customer payment terms and credit scores. This will help in detecting bottom-line concerns and slow-paying customers.
• Companies should make adjustments and identify the source of variances to improve long-term forecasting accuracy.

Advantages of long-term forecasting

Long-term forecasting and predictions can help recognize future issues, identify opportunities, and make strategies to strategically pursue management objectives. It also helps to achieve the following:

• Better production management
• Improved cash flow
• More effective hiring

How long term forecasting helps improve asset management

Asset management is a discipline that entails developing, implementing, and maintaining treasury procedures to assist businesses in better managing their cash flows. Another key aspect of asset management is risk management. In addition to cash and risk management, treasury management is responsible for ensuring the optimal use of cash assets, such as receivables and foreign exchange rates.

The treasury plays a key role in helping a business meet its financial obligations. This includes managing accounts receivable and payable, liquidity and debt management, and cash reporting. Here are some ways in which treasury can improve asset management:

• Determining the life cycles of the assets
• Tracking the assets on a regular basis
• Recognizing how the assets depreciate
• Implementing an asset management system that is automated

Managing the size and relative liquidity of a balance sheet is crucial for reducing the risk of not having enough cash to operate and increasing a company’s competitiveness by lowering its cost of capital.

Schedule a demo to implement long-term forecasting in your firm and know about other ways asset management can be improved.