Cash flow forecasting is an essential treasury process. The 2017 AFP Strategic Role of Treasury Survey reveals that 64 percent of financial professionals see cash management and forecasting as a key area of focus for their treasury departments over the next three years. As various faster payments initiatives around the world take shape, it has never been more important to have a robust and automated cash flow forecasting function that can provide you with a fast and accurate single view of cash.
At the most critical level, cash forecasting helps to ensure that the business has enough cash to meet its obligations. Forecasts are also essential for growth, as they guide strategic financial and investment decisions, shaping the future of the company and boosting the bottom line.
Challenges of cash flow forecasting
To get an accurate cash flow forecast, treasury needs to have visibility into the full extent of the organization's bank accounts. This can be a challenge, as business units or subsidiaries may have certain local accounts that have not been connected to the center, perhaps dating back to a past merger or acquisition. If you are starting or reviewing a cash flow forecasting project, a full inventory of all bank accounts throughout the business is essential.
Getting the business to buy in to the forecasting project is also vital. Treasury relies on both the accuracy and timeliness of the cash flow data coming in from the business, so it is important to have a good relationship with the key players. Subsidiaries may not immediately see the overall benefit of sending the cash flow data to treasury, so being able to demonstrate how this timely and accurate information can benefit the business as a whole, including that subsidiary, is essential.
Another challenge some organizations face is a reliance on manual processes in cash forecasting. Inputting payments data into spreadsheets is time-consuming and risks human error. A forecast can only be as accurate as the data that goes into it. Using a treasury management system (TMS) can standardize the cash forecasting process across the organization. Some TMS can automatically populate forecasting fields through connectivity with banking and payments systems.
Types of cash flow forecasting
A daily cash flow forecast is vital to ensure that your organizational liquidity levels are sufficient to cover your obligations for the immediate day or two. Getting a clear picture of cash before the end of the day gives treasurers the opportunity to invest any surplus overnight in an investment instrument with better interest than the standard bank account. This helps your daily cash work harder for you.
The short-term cash flow forecast provides data that allows the treasurer to be proactive as opposed to reactive, with comprehensive information on short-term accounts payable and accounts receivable requirements, as well as possible investment opportunities to help improve the bottom line. This forecast can also be used to build the picture for longer-term strategic forecasts.
A medium-term cash flow forecast can be useful to organizations that operate in industries that experience volatile demand throughout the year. This forecast outlines the big picture for the forthcoming year's profit and loss and cash flow planning. This data can play a key role in longer-term financial strategies, such as potential capital spending or debt issuance.
Long-term cash flow forecasts typically look between three and five years into the future. A long-term forecast is usually updated monthly and reviewed annually in line with business goals. These forecasts provide intelligence on which flows to hedge and when, and also benefit longer funding decisions, such as the scale of a bond issuance, for example.
A forecast fit for the future
Given the complexity of cash management for organizations today, an accurate cash flow forecast is vital to ensure the treasurer knows exactly what their cash position is today and going forward. A single view of this data informs decision-making that directly impacts business performance and growth. A TMS can provide this enterprise-wide view for treasurers, with the ability to drill down into specific business areas as well as assess cash flows in daily, short-term and longer-term windows. Additionally, using a TMS helps to eradicate human error, and provides a clear audit trail for both internal scrutiny and external compliance.
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