Cash Flow Forecasting

Cash flow forecasting is the basis of sound liquidity management. There are basically four types of cash flow forecast: end of day/overnight position (often called operational cash), short term (typically one day to 30 days) position, medium term (1-9 months), and long term beyond nine months and up to many years.

Types of Cashflow

Source: J&W Associates Copyright© 2011


Cashflow forecasting is difficult and needs senior management, not just treasury, to focus on getting commitment from the whole company. Some companies even tie part of their managers' bonuses to the accuracy of their cash flow forecasting.

Effective cash flow forecasting requires simple, robust and cost-effective services, which integrate the many different systems and sources of data that are used in cash flow forecasts. In addition, it is important not to aim for spurious and unnecessarily costly levels of accuracy. The accuracy of forecasts is improved by allocating the responsibility for producing cash flow forecasts to those departments that provide the forecast data, and by ensuring all tools and procedures provide feedback to the forecasters on their forecast accuracy.

Key Differentiators
Key differentiators in cash flow forecasting systems and services are: whether they prompt and pull the forecasts from the subsidiaries and operating units or just rely on them to send in the forecast data; the ease of collecting forecasts and other data from the business units in the organization, from their ERP systems - accounts payables and receivables, and budgeting systems; the efficiency of integrating bank balance and transaction data into current position and cash flow forecasts; the ease of including all operating, investment and financing cash flows; the speed of updating forecasts when data is received (some systems already do this in real-time); clarity and flexibility of the cash flow forecast reporting including analyses by bank account, country and currency; ease of analysis of the underlying business flows and seasonal cycle; the availability of audit trails and functionality to export data to other systems or services, e.g. to treasury management system and to Excel; the flexibility to incorporate new users, companies and types of business; and the range of charging options including - outright purchase, license, or via hosted services / ASP delivery.

Service Selection
When selecting a cash flow forecasting system or service, the needs and drivers of all parties (the treasury team, the cash managers and operating managers in subsidiaries, financial controllers and senior management) including the CFO and the CIO, should be included. It is also essential to develop an outline of how the forecasting process should operate to use in evaluating the available systems and services.

Although many companies still use the simple spreadsheet based forecasting systems, there has been a move over the last 2-3 years to use dedicated modules. These have been used to centralize cash flow forecasting and improve accuracy.

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