Accurate Cash Flow Forecasting: Key to Successful M&As

An overview of mergers and acquisitions

What is meant by merger and acquisition?

Mergers and acquisitions (M&A) involve combining two companies into one. A merger occurs when two distinct organizations join forces to form a new, unified organization. On the contrary, the taking over of one organization by another is referred to as an acquisition.

Mergers and acquisitions need a large amount of research and strategic planning. Before confirming the deal, it’s important for all the participating companies to know their future partners. This involves knowing the liabilities, problematic contracts, litigation risks, and intellectual property issues.

What are the three stages of M&As?

• Foundation
  This stage is the internal part of the acquisition. In this phase, organizations build the description for the company they are trying to acquire and create acquisition strategies to clarify the goals.
• Relationship
  After developing the acquisition strategy, the next step is identifying companies to acquire and persuading the owners to sell. This step involves building an intercompany relationship with an owner, which is an iterative process starting from an initial call, to a first meeting, and so on, and then eventually to a term sheet (a concise document submitted by the acquirer to the target company outlining the terms and price of its acquisition offer).
• Deal
  In this stage, companies conduct a last-minute business valuation and review after receiving the term sheet that has been signed. This helps to make sure it still fits well for the company, both financially and as well as in long-term growth.

Cash flow forecasting challenges that lead to lost M&A opportunities

Numerous studies have shown that businesses generate more value for investors when C-suites make choices and make investments for the long-term success of the company. For that, they need an accurate long-term cash forecast. But dealing with such massive amounts of data in a spreadsheet can be tedious and often error-prone.

Here are the following cash flow forecasting challenges for the purpose of planning mergers and acquisitions:

• Inability to identify best-case scenarios
  Spreadsheets or legacy systems fall short when it comes to scenario modeling and forecasting for companies. This happens because of outdated data or insufficient historical data to identify trends accurately. The inability to perform scenario analysis can hinder the company from identifying best-case scenarios for cash surplus. This can result in the inability to go forward with mergers and acquisitions
• Inability to identify idle cash
  Because most financial systems are siloed and decentralized, it is nearly impossible to integrate data seamlessly and achieve granularity to create timely reports and truly understand the areas of growth. Moreover, data spread across multiple spreadsheets and disparate systems hinder treasury from being able to spot idle cash on time. Due to this, treasurers can’t efficiently deploy funds for mergers and acquisitions.
• Decentralized cash forecasting process
  Decentralized cash flow forecasting follows a top-down method that leads to poor granular visibility and low accuracy by building cash forecasts from the global to the local level. As accuracy is lost, firms need to base their decisions on best guesses, experience, or intuition. This results in poor M&A planning.
• Inability to perform long-term forecasting accurately
  Companies usually face challenges in the long-term forecast because of changes in cash flows over time. Payment terms most likely vary across the different businesses. This adds more complexity as tracking various payment terms and customer behaviors are difficult. Lack of accuracy in long-term forecast hinders confident decision-making to manage idle cash, which could otherwise be used for M&A, fixed assets, buyback stocks, etc.
• Delayed investment decision
  Due to the high turnaround time for generating forecasts, the forecasting frequency can’t be increased. The vicious cycle of cash forecasting causes data overload and eventually leads to outdated cash forecasts. As CFOs have to rely on static and obsolete data for making timely decisions, they cannot grab investment opportunities early.

Impact of accurate cash flow forecasting on M&As

Most treasurers continue to rely on spreadsheets for forecasting. This process is time-consuming and manual. Some businesses build their own cash flow forecasting tools from scratch. But, this necessitates a significant investment in IT resources. TMS is also expensive and doesn’t provide much ROI to the treasury. Also, it requires proper training for the workforce.

Whereas a cloud cash flow forecasting software requires minimal IT involvement. It goes live within a few weeks by providing more bandwidth for strategic investment planning.

Role of accurate cash flow forecasting in M&As

Mergers and acquisitions provide opportunities to improve treasury processes, obtain funding for new technology, and demonstrate leadership. But, the risk of business failure is most likely what motivates C-suites to get an accurate forecast for global cash visibility, liquidity management, and risk management.

AI cash flow forecasting software helps to improve forecast accuracy by 95%. Accurate cash forecasting gives business leaders valuable insights into how the business performed in the past and how it will perform in the future. It also helps to achieve better M&A decisions in the following ways:

• Multiply gains by utilizing surplus cash
  With accurate cash flow forecasting, companies can plan capital expenditure project outlays in advance to stay economically secure. Additionally, they can take action toward M&A goals to increase profitability.
• Better asset management
  An accurate long-term cash forecast helps companies review assets’ quality, update, or replacement dates to save for new acquisitions and find buyers for depreciating assets.
• Rational scenario planning
  An AI cash flow forecasting software assists treasury in improving scenario analysis to be aware of cash surplus as it provides the foresight to track current and potential cash flows. Moreover, manual override enables users to check for various scenarios and take necessary actions. It assists companies in making better decisions by examining the risks and rewards of various options through accurate stress testing and rational scenario planning.
• High gross savings, leading to a low payback time
  Companies can focus on acquisition planning rather than data gathering and model construction with accurate long-term cash flow forecasting. Automated cash flow forecasting software also adds value by allowing the cash flow forecasting processes to be scaled and replicated across the company to other areas that perform the same or similar process with minimal extra effort and cost, significantly benefiting in high gross savings. Companies can invest that saved amount in mergers and acquisitions for achieving faster ROI.
• Scalable and standardized systems
  Centralized forecasting improves scalability and offers better control over the organization’s activities by ensuring consistency in operations and uniformity in decision-making.
• Granular visibility of cash flows
  AI enables incorporating external factors such as business cycles, seasonal trends, different payment terms, and discounts/rebates to obtain a more accurate forecast for A/R and A/P. Additionally, using suitable models also helps to get increased granular visibility, and the treasury team can drill down into different cash flow categories across different time periods, entities, and currencies.
• Data gathering from disparate data sources
  AI cash forecasting cloud automates data gathering through APIs and sFTP across multiple sources. This provides real-time cash positions across bank accounts, companies, pools, and currencies with transaction-level drill-down capability. For instance, an IT firm streamlined its data gathering from 200+ bank accounts and multiple ERP systems for generating automated cash forecasts using HighRadius Cash Forecasting System.

Best practices for informed M&As

• Evaluate the scale and operations of the company being acquired to ensure compatibility 
• Drive change management to get the treasury team comfortable with the new systems
• Track the data points to measure performance before and after the merger/acquisition
• Adopt an AI cash flow forecasting software that helps companies perform accurate long-term forecasting for strategic investment planning for business function expansion.

Get in touch with our solution expert today to understand how your company can improve its mergers and acquisitions decisions.