Unearthing How Technology Overcomes the Roadblocks in Cash Forecasting Accuracy

Companies can be classified into two categories based on their financial health, cash surplus companies and cash deficit companies. The characteristics of these two categories are:

Cash Surplus Company:

• It has plenty of cash reserves.
• Its interest income is low.
• It focuses on business expansions, mergers, and acquisitions.

Cash Deficit Company:

• It has already utilized most of the revolvers.
• It’s delaying payables.
• It focuses on tightly managing cash.

A cash surplus company can do with reasonable accuracy in their forecasts and might prefer long-term forecasts over short-term to focus on strategic investment planning and business expansion. However, a cash deficit company needs high accuracy and high-frequency forecasts to estimate when working capital will fall short in the near future.

Barriers in cash forecasting

Some of the challenges in cash forecasting are:

• Insufficient resources
• Poor information access/ exchange
• Organizational complexity
• Ineffective forecasting tools
• Lack of knowledge into internal cash flows
• Low priority by senior management
• Inconsistency between short-term forecast and budget

The impact of inaccurate forecasts

Subpar technologies limit cash forecasting accuracy, which negatively impacts cash flow such as:

• Increased cash buffers: Since forecasts are inaccurate, firms tend to increase their cash buffers due to financial distress.
• Higher borrowing costs: Due to the inability to foresee cash flows for an extended period of time, firms borrow at the last moment with higher interest rates.
• Penalties: Delaying payables can disrupt relationships with trading partners and get charged with penalties, or worse scenarios such as business shutdown.
• Delayed investments: Since companies increase their cash buffers, they are unable to grab investment opportunities early.

How technology increases forecast accuracy

Technologies like AI, RPA, and ML bring significant changes to the cash forecasting landscape and drive forecast accuracy faster. Here are some of the advantages that can be reaped from the following technologies:

• Robotic Process Automation(RPA): RPA performs repetitive tasks such as data gathering accurately and quickly.
• Machine Learning(ML): Machine learning helps in detecting patterns and improve forecast accuracy by studying data and evolving with time.
• Artificial Intelligence(AI): It is capable of consuming a huge volume of data and identifies correlations between variables to optimize accuracy while reducing variances.

AI revamping cash forecasting

AI supports adding multiple variables to track accurate payment due dates by incorporating customer-specific payment trends and patterns. The traditional Excel-based forecasting limits adding multiple variables, hence reducing the cash forecasting accuracy. Forecasts can be fine-tuned to make decisions on taxes, debts, investments with historical data. The additional benefit is that AI enables the use of suitable models for each cash flow category, and supports variance analysis to be performed for various periods.

The impact of accurate forecasts

Effects of accurate forecasts by leveraging AI:

• Reduced forecast turnaround times: The ability to run various scenarios in cash forecasts help in staying wary of market fluctuations.
• Effective cash management: Accurate forecasts improve the confidence in treasury and help in managing liquidity efficiently.
• Reduced idle cash: Less idle cash leaves room for making investments and acquisitions that are profitable for a firm.
• Increased strategic investments: Investment and M&A decisions for the long term are executed strategically by foreseeing the future financial status.

Impact on driver-based planning

Accurate forecasts enable performing timely and efficient collaborative planning and facilitate treasurers to make fact-based decisions for ‘what-if’ scenarios.

Impact at managing cash

Accurate forecasts increase the ability to:

• Meet short-term and long-term cash needs
• Manage working capital
• Control financial and interest rate risks
• Fund for business growth strategies

Impact on the strategic role of treasury

Technology supports treasury to closely monitor cash flows by forecasting frequently. This supports treasurers and CFOs to gain visibility into long-term horizons, and detect cash crunches early to take preventive measures during economic crisis.