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Cash flow forecasting - latest tips for practitioners

Over the last fews weeks there have been several tips on cash flow forecasting which are worth repeating:

Cash Analytics highlighted three key elements:

  • Direct Human Input: use domain or customer knowledge to improve accuracy, e.g. “knowing a specific customer’s payment patterns, allows adjustments to be made to a forecast”
  • Systems: don’t fall into the ‘over-automation trap’ in designing a forecasting process. “Systems don’t provide a silver bullet solution but are important for two reasons. Firstly they contain information necessary to complete the forecast itself and secondly they help with the automation of manual processes and analysis of data.”
  • Modelling: CA believe that “Modelling systems don’t provide a silver bullet solution but are important for two reasons. Firstly they contain information necessary to complete the forecast itself and secondly they help with the automation of manual processes and analysis of data.” Modelling should be used for “Revenue and input prices which are typically dependent on external factors such as customer demand, raw material costs and FX movements” and then tweaked using the latest available information.

But overall CA believe it is vital to understand what is needed for your particular company.

Wells Fargo in webinar. ‘Cash forecasting: The view from 10,000 feet’ with The Hackett Group presented their guiding principles of cash flow forecasting:

  • establish a well-defined cash flow forecasting and reporting process enabling strategic cash planning which assesses impact of revenue changes, predicts borrowing needs, reduces the need for cash buffer/reserves, improves risk management, facilitates management of your balance sheet
  • ensure that the key process steps are implementated including alignment of operations and financial planning activities and timelines, establishing clear communication and collaboration with stakeholders, agreement on forecasting method, models, frequency and timelines, agreement on forecast auccuracy and gap analysis targets
  • focus on key success factors including: getting executive sponsorship, clearly defined targets, alignment of expectations, cross functional collaboration, appropriate technology, and alignment of incentives to targets
  • ensure that the company has adequate visibility of cash flows based on understanding operation forecasts and has effective systems to manage the data.

Treasury Peer’s Magnus Lind LinkedIn post on ‘Cash Forecasting - Everything You Need to Know’ included:

  • the advantages of bottom up cash forecasting (15 reasons why companies chose to keep Bottom Up forecasting even though it is much more cumbersome
  • forecasting sources (13 listed)
  • challenges of bottom up cash forecasting (four reasons)
  • roles of group corporate treasurer, operating companies
  • key success factors “discipline, high organizational visibility and thorough, regular deviation analysis with back testing and detailed analysis. Making forecasting a habit, part of the DNA and regularly and actively followed up by C-level management”
  • tips, tricks and erroneous behaviour (13 ideas)
  • common errors (8 key errors).

Magnus finished his ‘everything you need to know list’ with an example of a Treasury Peer company who:

  • split each operating units cash flow into two accounts; one for incoming payments and one for outgoing payments
  • incoming payments’ accounts are controlled by central treasury (the funds can’t be used by the units)
  • central treasury funds the accounts for outgoing payments according to the forecasts
  • according to the accuracy of historical forecasts, central treasury adjusts how the future forecasts are ammended when funding outgoing payments which has improved the accuracy dramatically.

TIPCO’s Hubert Rappo on gtnews described five common sense steps to a better cash flow forecast:

  • remember one-size does not fit all: devising a forecast template that has the same structure for all your subsidiaries doesn’t work, because not all your subsidiaries are the identical
  • allow Excel - ban email: “make sure that your cash flow forecasting system allows to either copy and paste directly from Excel, or use systems that have an import functionality”
  • validate as early as possible: “Deviations between different forecasts can and will happen. However, it is a crucial point for the success of any forecasting system at which step in the process the deviations are detected and commented on. You should not be the first in the process to conduct validation of deviations. Instead, all the validations that you are doing should already be carried out by your subsidiaries as well. In the best case, all of the validations will be performed before the numbers are submitted to you.”
  • provide data at all costs: “Every forecast contains a number of items that already exist in another system. Before asking your subsidiaries to complete a cash flow forecast, you should conduct a detailed analysis to find out which of the items mentioned above are already available to you and hence can be provided to your subsidiaries in advance.”
  • give feedback: “to subsidiaries about their cash flow forecast. Elements of this can be automated. You could send out a set of reports to the subsidiaries showing the cash flow forecast and any deviations. However, if you encounter large deviations, you should pick up the phone and discuss with the subsidiary if and how the forecast could be improved.”

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Cash Flow Management & Forecasting
Cash Flow Forecasting
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