Common short-term forecasting roadblocks faced by cash deficit companies and strategies to overcome them

When is it appropriate to use short-term cash forecasting?

Direct cash forecasting, often known as short-term forecasting estimates cash inflow and cash outflow of an organization for a time horizon of up to six months. It forecasts payments which will be made on specific days or weeks during the month.

Short- term forecasts are important because:

• They provide a clear picture of future cash status and alerts when there’s likely to be a cash shortage. This allows treasury to make timely decisions in the event of a cash crunch.
• Shareholders and banks usually request critical information in order to assess if financial assistance offered is adequate or excessive.

Transactions, such as credit and cash transactions, bills, invoices, and tax, are included in the direct approach. CFOs and treasurers often rely on direct cash forecasting for having a precise cash forecast.

Benefits of short term forecasting

Some benefits of short-term forecasting are:

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  Lowering the cost of working capital

  
  

Keeping ahead of the curve by successfully managing working capital and reducing the amount of credit used to cover operating expenses.

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  Measuring the state of finance

  
  

Identifying the cash deficits or surpluses by analysing the cash flows and providing a fair picture of a company’s financial health.

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  FX exposure management that works effectively

  
  

Forecasting can also detect predicting foreign exchange risks, allowing treasury to plan and execute appropriate hedging actions to reduce risk.

Which pitfalls should be avoided for cash deficit companies?

Roadblocks in accurate short term forecasting:

The following are some of the drawbacks of inaccurate short-term forecasting:

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  Incorporating up-to-date and accurate transactions frequently

  
  

Since some companies store their data on spreadsheets, they need to make the updates manually. This hinders them from incorporating the bank data into their forecasts as frequently as desired. 

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  Handling deviations between forecasts and actuals

  
  

The lack of a proper cash forecasting software leads to inaccuracy in forecasts and incapability to understand variance drivers.

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  Addressing the corporate organization’s needs

  
  

Inaccurate short term forecasts limits treasury from understanding their short-term cash needs or detecting potential cash crunches. This leads to lower confidence in making timely decisions.

 How to perform short-term cash forecasting accurately?

How to maximize the value of the short-term forecasts?

Organizations can manage their short-term cash forecasting more effectively if they can produce accurate short-term forecasts.

Some tips to improve short-term flow forecasts accuracy:

• Create short-term forecasts frequently: Creating forecasts daily, weekly or monthly gives an accurate estimate of the future cash flows to ensure available liquidity for short-term needs, such as borrowing.
• Check whether all the cash in the bank account is accessible: Cash deposited as collateral for imports and minimum cash balances are  examples of cash in the bank that you can’t access to pay creditors. These types of balances should be shown individually and referred to as “trapped cash.” To access the bank data easily, data should be aggregated automatically with cash forecasting software.
• Accurate variance analysis: Variance analysis is a standard tool for determining the difference between budget estimates and actuals. Comparing forecasts to actuals frequently helps to understand the root cause of the variance. This assists in the identification of areas that require improvement. It also helps in proper budgeting, risk management, and forward-thinking to execute proactive decisions.
• Leverage AI to forecast sales: Artificial Intelligence captures different customer payment patterns and supports adding multiple suitable variables to enhance cash forecasting accuracy while forecasting sales.

Accurate short-term cash forecasting can significantly improve a company’s capacity to manage debts and investments, and make better, more informed cash decisions.