October 18 , 2018

How to Achieve Cash Management Excellence, part 2: Cash Forecasting

by Working Capital Optimization, Cash Management, Liquidity Management

Understanding the future cash position is crucial to any corporate Treasurer who wants to stay ahead of the curve and be prepared to secure their Group’s liquidity in all circumstances. For me, proper cash forecasting means two things: eliminating cash flow surprises and improving liquidity decisions.

cash forecasting

If I were a Treasurer responsible for Group liquidity and funding, I’d first do my utmost to eliminate all surprises from the future cash flows. We all know you can’t eliminate all surprises, especially in these turbulent times, which makes it all the more important to keep a close eye on the things you can predict. For instance, I’d want to be aware well in advance about all substantial cash outflows from the Group in order to secure funding and reduce the liquidity risk.

Secondly, I’d make sure I had the transparency needed to make informed and accurate financial decisions. Ill-informed decisions can leave you with excess, idle cash at the end of the day or have you arranging a funding that won’t be needed after all.

In this blog post, I will focus on how to excel at cash forecasting with the support of a specialized cash forecasting software solution. It is important to note that in order to predict the future cash flows accurately, you need to first know where you are today. I covered the importance of cash visibility in my previous blog.

Focus on data analysis, not on data collection

The secret to reliable and insightful cash forecasting is to shift focus from the input to the output, from data collection to data analysis. The fact is that most of the cash flows in and out of the organization are known in advance before they hit the Group’s bank account either as debit or credit. In practice, the cash flows are unallocated customer invoices in Accounts Receivable, unapproved supplier invoices in the purchase invoice processing workflow, or purchase orders in the e-procurement system. The trick is to tap into this data in a seamless – and automated – way.

That is where a specialized, integrated cash forecasting software comes into play. Typically, files are automatically exported from various source systems to a common shared directory, and then imported on a daily or a weekly basis into the forecasting solution. In a modern Treasury, most of the forecasted cash flow data should be available for use automatically, and only ad-hoc or non-ledger cash flows, such as payroll, tax, or adjustments to ledgers should need to be manually entered for forecasting.

Where the spreadsheet forecast falls short

In addition to the integration that automates the input for cash forecasting, a specialized software provides various useful features to support the corporate Treasurers along the forecasting process. These features help save time from routines to more value-adding tasks and ensure the accuracy of the forecast. For example:

  • Monitoring. The monitoring capabilities of a forecasting software make it easy for the Group Treasury to detect if a bank statement is missing from the data flow, if the opening balance doesn’t match the closing balance, or if an entity has missed submitting their forecast.
  • Reporting deadline reminders. The Group Treasury should not have to send emails or make calls to remind the entities to confirm their forecasts. With a specialized software, the reminders can happen automatically.
  • Recurring transactions. If the amount is the same, recurring transactions can be set to repeat, which minimizes the need for manual input.
  • Excluding bank holidays. On bank holidays and on weekends there are typically no cash flows. Taking this into account and excluding the days from the forecast is hard to manage in a spreadsheet but easy for a specialized software.
  • Multiplier locks. A very common source for errors in cash forecasting is that different multipliers are used (thousands or millions, for instance) in different places. With the support of a specialized software solution, you can choose and lock a Group standard for the multipliers and even add confirmation checks before the forecasted flows are saved to the database.
  • Mass transaction operations. When an error happens, the ability to roll back can be crucial to be able to meet tight reporting deadlines.
  • Importing from a spreadsheet. It can sound trivial, but the reality is that a lot of important forecasting data is still in spreadsheets. Thus, a feature to import from .csv is an important one.

3 ways to take a step further in cash forecasting

You should start your cash forecasting with best practice reports, such as cash flows per cash pool, per bank and per business entity. But when a more advanced reporting and analysis is needed, the flexibility of the reporting engine in your cash forecasting solution becomes crucial.

You might want to drill down to the forecasts on a row or column levels. Or you might want to sort different currencies in the same graph. Whatever it is, it should be possible: the users’ needs (not the software’s limitations) should be determining what is possible in the reporting.

To enable constant improvement of your forecasting accuracy, you need feedback. A report on forecast vs. actuals should be a standard part of professional cash forecasting. Such a report should be easy to build and maintain so that it can be used in deviation analysis for the reporting entities.

Finally, stop to ask why you are creating the cash forecast reports in the first place. To make the insight gained available for decision-making, you need an easy way to share the reports with colleagues and stakeholders. Sharing functionality via email or a gadget in a dashboard are proven ways to get attention to the reports and the financial facts they reveal.

The information should not only be easy to share, but it should also be easy to consume. Join me in a webinar where I’ll demonstrate the new Reports module in OpusCapita Liquidity and show you in practice how delightfully beautiful and easy-to-read cash position and forecasts reports can be.


Karl-Henrik Sundberg

Karl-Henrik Sundberg

Karl-Henrik is a passionate Cash Management professional with background as a Cash Management Advisor at a large Swedish bank followed by six years as a Cash Management Director at a Treasury department in a global multinational. Educated in Finance but with a "techie" mindset he is often seen speaking to his smartwatch or discussing disruptive Fintech with like-minded.