Struggles of Forecasting Cash in a Turbulent World

COVID-19 and its impact on corporate treasury
COVID-19 has presented an unprecedented challenge to the corporate treasury. Businesses are focusing on maintaining liquidity but as the global economy continues to worsen, the operational, financial, and liquidity challenges mount for businesses in many sectors. Thus, businesses need to arm up to protect their cash flows.

The three critical steps that help businesses protect their cash flows are:

• Analyze your existing financial situation and evaluate available and trapped cash
  • Understanding available cash and discovering any options to free trapped
    capital is critical.
  • Short-term cash flow projection should be as accurate as possible and it should be evaluated frequently to ensure that it accurately reflects the most current financial situation.
  • Forecasting should be done frequently (if possible, daily), to identify the blindspots in forecasts, and make adjustments to improve accuracy for better decision-making.

• Understand your cash position
  • Cash position is tracked by gathering data from data sources, including ERP, TMS, banks, and other accounting systems.
  • Directors and management teams can take quick action to preserve the cash position.
  • Some companies have designated a Chief Restructuring Officer (CRO) or Turnaround Director who is responsible for preserving the cash position and guiding the company through the restructuring process.

• Manage internal and external stakeholders

Successfully managing financial issues requires not just preventive measures, but also clear and constant communication with internal and external stakeholders. The following steps highlight how to manage internal and external stakeholders:

• Identify key external players, communicate with them proactively, and manage their issues on priority.
• Identify the information that shareholders, pension trustees, regulators, credit insurers, and credit card firms require.
• Create a clear communication strategy to ensure that your message is consistent across all platforms.

Some of the common problems faced by treasurers are:

• Error-prone spreadsheets : Treasurers mostly use spreadsheets for data gathering, but they may not always have the bandwidth to ensure spreadsheet accuracy.
• Cash management : To maintain long-term efficiency, real-time data and analysis are required. But due to the lack of the right treasury software solutions, managing cash in real-time becomes difficult.
• FX risks : It is challenging to control exposure to the unpredictable foreign exchange market and changing interest rates.

A cash management tool provides a 360-degree view of a company’s cash position. As a result, treasurers can view cash balances in real-time, across multiple banks, entities, accounts, currencies, and regions.

Three ways in which treasurers can address their problems with technology

• Automation : Technology investments made across the organization can improve the effectiveness of treasury management and applications. Automation delivers straight through processing, scalability of treasury processes, and time and costs savings.
• Accurate cash flow forecasting : Having an accurate cash flow forecast helps treasurers to foresee economic threats and devise strategies to prevent cash shortages. It also helps treasurers utilize their idle cash for investments and M&As activities. Thus, they can effectively monitor and manage risks with accurate data.
• 4E framework : Treasurers need to follow the 4E framework to keep up with the changing times in treasury:
  • Embrace : Embracing change and be open to new ideas
    an technologies.
  • Evaluate : Evaluating abilities frequently to see if they are appropriate for the present and future.
  • Empower : Learning new skills with cutting-edge technology.
  • Educate : Learning about the current and future technologies through webinars, training, and other means.

Treasurers’ confidence in making business decisions and ability to foresee potential crises can be improved by real-time cash flow data. Since treasury is in charge of all company’s cash flows, teams must respond quickly and proactively in order to avoid a financial crisis. They can be proactive in the following ways:

• Fast-tracking the cash conversion cycle
  Forecast A/R with high accuracy to optimize the cash conversion cycle. This allows treasurers to precisely estimate payment dates by tracking customer-specific payment patterns.
• Experimenting with various scenarios
  Stress-test various short and long-term situations to take corrective procedures to mitigate the effects of those scenarios.
• Preparing long-term forecasts
  Create long-term forecasts to make informed judgments on investments, business expansion, and mergers and acquisitions.
• Preparing accurate and timely forecasts
  Use continuous variance analysis to produce accurate and up-to-date forecasts in order to reduce the requirement for large cash reserves and high-interest borrowing.

How can the treasury team be ready to respond in the event of a crisis?

Treasury teams can use an automated cash forecasting solution in the following ways to respond to a crisis:

• Use the baseline forecast for analyzing and fine-tuning forecast models
• Incorporate both internal and external data in your forecasts
• Adopt ways to get an early warning of a cash constraint

A cash flow forecast allows businesses to track expected cash movements over a period of time in the future, and cash forecasting has been a top priority for treasury for more than a decade. However, cash forecasting can take up a significant amount of time for treasurers. Firms must adopt technologies such as automation and Artificial Intelligence to eliminate such issues in the future and improve cash forecasting accuracy.

Advanced technologies to refine cash forecasting

• API : It provides seamless integration with banks, TMS, ERPs, and FP&A systems.
• RPA : It helps treasurers in gathering information on bank statements and cash flow forecasts.
• Data Lakes : It can store data in a single place for easy data access.
• Dashboard : It interprets data visually in the form of graphs to analyze data easily.

Treasurers should consider the following questions to improve their cash management strategies:

• Can they stress test best and worst-case scenarios through their forecasts that can help them mitigate today’s financial threats?
• What benefits can they get with automation and centralized forecasting?
• Is it necessary to revise existing KPIs or introduce new ones?
• Is the generated reporting fit for purpose, and does it satisfy the end users’ requirements?

Schedule a demo with HighRadius today to improve cash flow forecasting for effectively managing liquidity when a crisis hits.