Cash flow forecasts are often tied to the fiscal year but business dynamics have life cycles of their own, which don't always fit into neat quarters. Is a less static approach to forecasting needed?
Traditional cash flow forecasts provide insight into the business's liquidity needs, risk exposures, currency hedging requirements and allocation of resources for the months or year ahead. Some companies forecasting up to 12 or 24 months out, some concentrate on just the coming quarter or six months. However, there is a strong argument for adapting the way corporates manage and produce their cash flow forecasts, with some advocating a more flexible approach that fits in with the dynamics of the business cycle, rather than dates set in the accounting calendar.
A rolling forecast gives the corporate treasurer and financial planner more flexibility and enables them to concentrate on the business's short and long-term needs, rather than being tied down by the time horizons of financial statements.
A guide published by the Association of Financial Professionals – available here – outlines the critical success factors for a more fluid approach to forecasting. Some of the key factors to effective rolling forecasts mentioned in the AFP guide include the following:
Six factors for successful rolling forecasts
- Align the forecast with the market and the company’s industry dynamics. The more volatile the market, the more frequent the forecast and the shorter the time horizon.
- Implement a top-down, driver-based model. This means automating the input of key data into the forecast.
- Take it in stages. A staged rollout is generally advisable, selecting one or a few business units to start.
- Alter your compensation method. Separate target setting from forecasting. Targets are aspirational but forecasts should be realistic projections.
- Give participants responsibility. A rolling forecast should involve a carefully selected number of staff, who should be responsible for providing updated, accurate data.
- Link to strategic and operational decisions. Outputs of each rolling forecast cycle should be used to inform and influence ongoing strategic management and operational performance reviews, as well as business and operational planning.
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