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Good versus bad cash flow forecasting

A lot of companies around the world are increasing their efforts when it comes to cash flow forecasting. Some do so with more impactful results than others. This articles explores what sets good cash forecasting (i.e. accurate and efficient forecasting) apart from bad cash forecasting (i.e. not transparent & time-consuming cash forecasting).

Key success factor #1: being able to drill down into your actual cash flow drivers and using transaction level / granular data

A lot of Corporate Treasurers are seeking an accurate cash forecast, a delicate combination of well-chosen cash flow drivers & assumptions. But, to which extent do they have a good view on these cash flow drivers, do they know what is really eating and feeding their cash (more than the typical high-level AR, AP, Treasury flows that your Treasury Management System will consolidate)?

There isn’t a lot of visibility, unfortunately. Why is that? The classic TMS will typically consolidate basic forecasted flows from the different OpCo’s. The problem is that these OpCo’s cash forecasts are already consolidated from the underlying business transactions. This blurs the insight in the real cash flow drivers and gives no assurance whatsoever on the quality of the data.

To build a good forecast, it is important to have clear and error-free access to the underlying business transactions. In a recent PwC study, only 6% of respondents said they made use of the inputs at the transactional level. But thanks to new modern technology, treasurers can have instant access to the details of the underlying cash movements and are given the ability to drill down to transaction level. In the gif below, you can see what this means in practice.

Suppose you want to know exactly what drives your company’s cash flow in a certain period. The GIF below demonstrates how easy this could be, using the right platform. Via an easy-to-use click-through interface, the user is able to gain insights per month, week and day including instant access to the transaction level details:

Source & Copyright©2017 - Cashforce 

Key success factor # 2: Applying the right forecasting logic is crucial for a good forecast

Cash flow forecasting is often associated with a pile of Excel sheets and manual work. Treasurers are forced to turn to Excel to calculate their forecasts, because classic Treasury Management Systems do not offer the required flexibility.

Getting insights into all your OpCo’s cash flow drivers is one thing, but combining all these data sources and applying the right logics/rule is another. Let’s take the easy example of applying payment behavior. It makes sense to enrich invoicing & sales order details with data on actual payment behavior.  Many companies, however, struggle to take the actual payment data into account. In general, they haven’t found the appropriate algorithms to include into their forecasts. Hence, they face inaccurate forecasts and a lot of time is spent in explaining (over and over again) why it was inaccurate.

It seems defining forecasting logics in a smart way is a real challenge. Yet, if your goal is to achieve an accurate forecast, a set of smart logics is invaluable. Again, modern technology proves to be a great asset. Progressive companies are using technology-driven, smart engines to calculate their cash forecasts, taking over the manually intensive work.

Below you can see how a smart engine works in practice. Cash flows are projected into the future (blue line) using a set of forecasting logics. The dotted orange line represents a scenario with one or more of the underlying assumptions changed and immediately shows the impact relative to the blue line:

Source & Copyright©2017 - Cashforce 

Key success factor #3: A good forecast is one that is used to drive action

Still, even if a forecast is produced, it might be underused, or not used at all. To make a real impact, there should be actions based on the forecast results. There is a lot of potential in accurately knowing what might happen in future and this potential should be translated into value. There is even more value in considering multiple scenarios by changing some of the underlying assumptions (e.g. payment runs). Unfortunately, changing assumptions might trigger a lot of additional manual work (when working in Excel or a TMS) and is thus often avoided.

To get the most of your forecasting process, it makes sense to build multiple forecasts and assess the impact of each of these scenarios on cash optimization. Driving action combined with building multiple scenarios, transforms finance departments into business partners for fueling a company’s growth.


Source & Copyright©2017 - Cashforce 

The orange line reflects a scenario, built by the user. This views gives him an immediate comparison between the current forecast (full blue line) and a different scenario (based on assumptions made by the user). A powerful simulation engine is able to show the impact of different scenarios in a blink. Imagine the power this can bring to a business-driven finance department.

Cashforce: These are a few key success factors that set apart good forecasting from bad forecasting. One constant remains: technology has the power to enable finance departments to (re)gain control of the forecasting process. 

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