Three Tips to Master Long Term Forecasting for Making Strategic Investment Decisions

Why does treasury use long term cash forecasting methods?

Long-term cash forecasting, often known as indirect cash forecasting, is a cash forecasting method for understanding if current decisions will have long-term implications. It forecasts cash flows for periods of six months to five years, including investments and borrowing, using a pro forma balance sheet and profit and loss statement. Ending cash balances are derived by subtracting non-cash charges from net income and factoring in projected balance sheet adjustments.

Here are the top 3 tips to help treasury for improving their long-term cash flow forecasting.

3 Tips to master long-term cash forecasting

Tip #1: Understand the purpose of long-term cash forecasting/indirect cash forecasting

Long-term forecasting helps in avoiding last-minute hurdles. The need for long-term cash forecasting are:

• Stay financially stable by planning outlays on capital expenditure in advance.
• Take steps toward achieving the FP&A goal to boost profitability.
• Understand variances in forecasts and dig into the focal point of error to make corrections and mitigate risks.
• Eliminate the need to maintain a higher cash buffer to save interest costs.
• Quantify profits by reducing borrowing costs.
• Review the quality, update, or replacement dates of assets to save for new acquisitions, and find buyers for depreciating assets.

Tip #2: Improve forecasting accuracy of long-term cash forecasting

Due to the volatility, most businesses find it difficult to forecast A/R and A/P. However, even for complex cash flow categories, adequate models and algorithms and AI cash forecasting can be used to improve accuracy.

Four pillars to enhance accuracy

• Approach: Roll-up forecasts from local to global level for the entity, company code, country, and currency to increase visibility.
• Data Gathering: Use API integration, imports and exports, and other means, to automate data collection from diverse sources such as banks, ERPs, TMS, FP&A tools, Payroll, A/R, and A/P teams.
• Modeling: Use specialized models for each cash flow category. For example, use AI models to create long-term forecasts for complex categories such as A/R and A/P, and heuristic models for simpler cash flow categories like payroll, taxes, and so on.
• Variance Analysis: Compare forecasts to actuals and find the deviations and the root causes of variance frequently to receive a superior report and make informed data-driven decisions.

Leverage AI cash forecasting to obtain accurate forecasting results

• Overcome the roadblocks in spreadsheet: Spreadsheet-based data crunching and aggregation is time-consuming, error-prone, and reduces long-term visibility. Whereas, granular visibility is improved through drill-down capabilities into entity-level data. Furthermore, without having to hunt through different spreadsheets and portals, teams can readily access data at any moment.
• Recognize economic downturns: Long-term forecasts are inherently unreliable due to the unpredictability of economic downturns. But, through a feedback loop model and frequent variance analysis, long-term cash forecasting accuracy is increased utilizing AI cash forecasting. Accurate data improved decision-making for borrowing, investing, and M&A.
• Abundance of historical data: It could be challenging for businesses that don’t have enough historical data to work with. The organization may face financial consequences if the forecasts fail due to a lack of data. However, automated cash forecasting software easily integrates with ERP, TMS, banks, payroll, and tax systems, among other systems.
• Incorporating scenario analysis: Scenario modeling provides investors with tangible, measurable information to improve decision-making for investments and to mitigate potential losses, concentrating on long-term forecasting by avoiding worst-case scenarios, for instance, cash crunches, M&As, capital expenditures, etc.

Tip #3: Choose an appropriate system that meets the long term cash forecasting requirements

The ultimate purpose of technology review is to find a solution that fits long-term needs. The treasury software can be chosen in a variety of ways:

• Learn about the latest technological alternatives and features offered by SaaS companies (both online and offline) by using Google, LinkedIn, or visiting conferences.
• Analyze software using AFP, Strategic Treasury, Bob’s Guide, or other treasury technology tools.
• Visit vendor websites to obtain product information and read customer testimonials to gain a better idea of the product’s capabilities.
• Evaluate the pain points to see how well the company’s solutions help the company grow and produce revenue.
• Schedule an initial call or a brief demo to understand:
  • The company’s existing landscape or procedure
  • The present issues and difficulties
  • The ‘must-haves’ and ‘extras,’ and the priorities
  • The budgeted amount
  • The timetables