Cash Flow Forecasting System: Uses, Example & Benefits

What is a cash flow forecasting system?

A cash flow forecasting system is a tool used to estimate future cash inflows and outflows, helping businesses anticipate and prepare for future financial needs and fluctuations.

Why is cash flow forecasting system important for mid-markets?

Cashflow forecasting is important for mid-market companies because it gives the necessary vision into the future to detect liquidity shortages. For example, an accurate 13-week cash forecast provides complete visibility into an organization’s cash balances until the following quarter’s completion. 

According to a survey of Global Treasurers, 89% of treasurers stated cash forecasting as their top concern, and 83% stated cash forecasting inaccuracy as their most significant concern. 

Mid-markets usually focus on forecasting future cash positions, proactively planning for any cash shortages, releasing trapped working capital, and making borrowing decisions. Hence, they require accurate cash flow forecasts to improve their long-term decision-making. However, their forecasts aren’t often accurate to make prudent decisions because of manual or non-scalable systems. 

What are the limitations of manual or legacy cash forecasting systems?

The following are some of the issues that mid-market companies face that affect cashflow forecasting accuracy:

• Unable to capture seasonality:
  

  Seasonality is often hard to factor in because each business has peak and low sales times. If seasonality is not incorporated into the cash flow forecasting tool, mid-market companies will be unable to maximize profit margins or benefit from cost savings.

  
  
• Lack of cash visibility:
  

  There are complex cash flow categories like A/R, A/P, and CAPEX at regional and company levels. But spreadsheets do not allow tracking individual cash movements for each type, which makes it difficult to make confident decisions.

  
  
• Disconnected multiple pieces of data: 
  

  Businesses have data stored in different formats in disparate sources (ERPs, bank portals, FP&A systems, TMS). Aggregating this data manually is tedious while using manual systems such as spreadsheets or legacy systems such as TMS.

  
  
• Last-minute variance analysis:
  

  Most times, due to the unavailability of robust systems, treasury analysts themselves gather the data on variances manually at the last moment, and usually only when treasurers require immediate feedback. As a result, variance analysis is done for short periods and is mostly error-prone.

  
  

  What are the reasons for adopting cash flow forecasting system?

  
  

  The above bottlenecks emphasize the need for an advanced cash flow forecasting tool. The additional factors that influence cash flow forecasting technology are:

  
  
  
  
  • Business growth (such as M&A)
  
  
  • Regulation, tax, and accounting changes
  
  
  • Treasury operations improvement and the need for efficiency and centralization
  
  
  • Market trends changes
  
  
  • Emergency requirements, including market fall and business continuity assistance
  
  
  
  

  Overall, an advanced cash flow forecasting system plays a vital role in keeping corporate finances on track by enhancing agility and control to maximize the efficiency and accuracy of all cash reporting. 

  
  

  What are the benefits of a cash flow forecasting system?

  
  

  

  
  
  
  
  • End-to-end automation for easy collaboration
    

    According to the Work Market 2020 Insight Report by ADP, 78% of business leaders believe that they could save up to approximately 7.5 hours a week by automating tasks, and 85% of business leaders believe that automating some of their tasks will give them and their employees more time to focus on company goals.

    
    

    Advanced cash flow forecasting enables treasury to perform end-to-end forecasts with utmost accuracy. Additionally, the SaaS software provides analytical insights into a firm’s liquidity and foresight to its future monetary position and provides confidence to treasurers ensuring business continuity and development.

    
    
  
  
  • Increased forecasting frequency
    If a mid-market firm forecasts weekly, automation can increase forecasting cadence to daily. This will help treasurers track deviations, trends, and irregularities more precisely. Hence, they will be able to improve their accuracy and timeliness in cash forecasting, decision-making, and reporting.
  
  
  • Boost market value
    As the turnaround time is reduced and the accuracy is increased, the treasury team can develop reliable and timely reports to distribute to investors, the board of directors, and others, resulting in greater credibility.
  
  
  • Improved variance analysis
    Cash flow forecasting tool supports drill-down-functionality into forecast variances across cash flow category, regional, and company levels to spot, report, and reduce the variations. 
  
  
  
  

  For instance, a leading construction company with 900+ projects faced less scope for cashflow forecasting improvement. HighRadius cash flow forecasting system provided them with root case variance analysis at multiple levels to understand the areas causing variance.

  
  
• Accurate scenario analysis
  The AI cash forecasting tool provides manual override (spreadsheet-like feature) to stress-test multiple scenarios easily. It also helps automate modeling scenarios across numerous cash flow categories, regions, and currencies.

Check out HighRadius’ cash forecasting system with self-service models with an intuitive Spreadsheet UI.