At the Association of Corporate Treasurers Cash Management Conference on 12-13 February 2014, cash flow forecasting was by far the highest priority of the attendees. Also, in a recent survey AFP found that members’s primary challenge was to integrate risk and forecasting data with decision making. No wonder, cash flow forecasting is by far the biggest problem for corporate treasurers managing liquidity, FX exposures, % rate risk, etc. because the forecasts have so much impact.

Even so, many of the inaccuracies are simply due to not adopting simple best practices. The other problem is some senior management do not accept the basic reality that 100% forecast accuracy is just a co-incidence (see). Also they have to accept inaccuracy, AND that there is no single perfect solution. 

Best practices 

Bringing together the best practices from many reports, case studies, various analyses, etc., Cash & Treasury Management File’s 15 top best practices in cash flow forecasting are:

• select the forecast horizon that fits your business

1. use at least two forecasts - short term 4-13 weeks, and longer-term budget type forecast; a mid-term forecast may be necessary as well (see), e.g.
2. daily : 4 weeks out
3. weekly : 13 weeks out
4. monthly : 12 months out

• accept that these forecasts will have different levels of accuracy and will conflict with each other. However, that doesn't mean you should stop doing them.
• use rolling forecast process that have no end dates, 
• play your part in ensuring that the company make the cultural shift to making cash flow forecasting a natural part of how the company operates 
• make it as easy as possible for employees to put together budgets and forecasts by providing the technology and simple processes that minimise admin and prompts them when they are late
• identify and incorporate the key drivers of your business into to cash flow forecasting process
• automatically extract the A/R and A/P data from all your ERPs
• BUT do not rely just on the actual dates in the A/R and A/P files from the ERPs around the group, incorporate reviews of individual customers and supplier payment histories including a review of the pattern of supplier invoices based on receipt by value. (This will take account of invoices that are received after the payment due date.)
• focus on the large key items in the forecast, Pareto principle really works in cash flow forecasting 
• don't forget that cash flow covers both the business units and the central departments. Head office often has the biggest cash flows, e.g. dividends and interest, insurance and legal fees, tax and treasury, M&A funds flow
• use auditable processes and systems for cash flow forecasting 
• provide visibility and feedback on cash flow forecasting performance to business units AND head office
• force managers to take cash flow forecasting seriously, by linking managers’ some part of their bonuses and remuneration to the accuracy of their cash flow forecasts
• leverage technology to support the forecasting process using whichever system fits and complements your company/group, and move from relying on Excel wherever possible. Treasury management systems, ERP systems, and the stand-alone cash flow forecasting modules & services now offer enough flexibility and functionality to solve most companies’ cash flow forecasting requirements.

CTMfile take: Cash flow forecasting is never easy, and there is no perfect solution, but adopting these best practices should enable you to do as good a job as possible in your business.