Cash & Liquidity ManagementCash ManagementCash ForecastingThe Cash Forecasting Challenge: Build a Business-to-Treasury Bridge

The Cash Forecasting Challenge: Build a Business-to-Treasury Bridge

Cash flow forecasting has been one of the most discussed topics in the corporate treasury field in recent years. Even though continuously seen by most corporate treasurers as a top area for improvement, little progress has been made. In this article, I will discuss the essential objective of cash flow forecasting and some basic steps to achieve greater returns.

Hurdles to Efficient Forecasting

Treasury professionals all undoubtedly understand the significance of cash flow forecasting yet most corporations still struggle with manual processes and lack of visibility into forecasted cash flows. Why is it so difficult? Let us remind ourselves of some of the common reasons for not having an efficient process in place:

  1. “Our business units are not capable of providing accurate and timely forecasts.” Answer: Your business units are the best and only experts on their cash flows. It is a question of motivation, priority and guidance.
  2. “We have so many different ERP systems in place that it is impossible to create reliable forecasts from them.” Answer: Integration of systems may be helpful but without the human touch of an expert within the business unit, the integrated data can still be unreliable if it comes from any other system than the TMS where all cash flows are fully committed.
  3. “We haven’t found a good cash forecasting system yet.” Answer: Do not fall into the trap of seeing cash forecasting as a systems project. Start by building the business-to-treasury (B2T) bridge and continue by finding practical, quickly deployable tools from your bank or technology providers.

Objective of Cash Flow Forecasting

The basic concept of cash flow forecasting is simple: you collect all possible information about outgoing and incoming cash from the people who are responsible for managing those cash flows. But if you insist on complete coverage and absolute accuracy, this concept can prove to be an endless and frustrating task and I am not surprised if you end up reverting to the three familiar excuses listed above. Instead of getting tangled up with complete data systems integration or demanding absolute accuracy from your subsidiary experts, take a step back and ask: “What is my essential objective when it comes to cash flow forecasting?”

Cash forecasts are required in order to be prepared for the near future funding need across the company. Some level of uncertainty will always be present and people learn by doing – hence your criteria for successful cash flow forecasting must be a constantly developing measure. Define intermediate milestones to tackle the challenge in small steps and work continuously towards the final objective.

Remembering the famous Pareto Principle, one can say that 20% of the effort produces 80% of the result. While this principle can be applied to almost anything with almost any ratio, the important point is that you do not necessarily need to make the complete investment in the ideal solution to achieve great results. How much is your 20% and what can it provide in return?

In most corporations where a treasury process development project is seen as a systems project, the biggest challenge is budget. Integrated systems are expensive, they require IT investment and take a long time to implement. For the sake of argument, imagine 20% of the capital and human resources investment in the systems project you were thinking of. Then look at your B2T relationship: do you have a working partnership with your business units?

Your first 20% investment would be worst spent on a sophisticated system if your business units have no motivation to use it. The first and absolute prerequisite for any improvement in the quality of your cash flow forecasts is ensuring that the people who possess the information have understood the objective of forecasting and have personally bought into its significance.

Building the B2T bridge means that you create a mutually beneficial partnership with your business units. In a B2T partnership, it is crucial that the business units understand what is required from them, and that they have all the resources needed to be able to contribute to the partnership.

The first step is to sell the idea to management. To be successful in your project, you need top management support in order to make cash forecasting a high priority for the business units. But while the benefits of improved cash forecasting are obvious and can deliver substantial savings, you should not take management support as a given. You will still need to sell the idea to them. Make sure that you describe the clear benefits and costs without any unnecessary treasury jargon, and remember to include justification for the increasing reporting burden in the business units. Once you have management support, you can focus on establishing the partnership and delivering the right message to the business units.

Treasury Work Instructions

Since we’re talking about a motivation and co-operation project, you must understand who the people in the business units are and how they think. In short-term cash forecasting, the people responsible for managing accounts payables and accounts receivables are your key partners but don’t necessarily have expertise in treasury issues. They have many other high priority tasks and treasury-related issues are seldom at the top of their agenda. In addition, they don’t usually understand the corporate level benefits of cash forecasting and why it is so important that they make the forecasts according to their best knowledge.

The treasury policy seldom helps because often it is written in a way that is hard to understand outside the treasury department. Hence, it is important that treasury provides the business units with a clear and concrete work instruction document in addition to the policy statement. The instructions should describe the different roles in the process and provide:

  • A detailed description of what the business unit needs to do. This is usually directly derived from the policy but has to be written in concise terms.
  • Motivation for the business unit representative to act in the desired way. Give concrete examples of how better forecasting can benefit the company.
  • Concrete explanation about the tools and steps to be applied in fulfilling the task.

A good work instruction will motivate the employee to do their best in fulfilling the essential objective of the task. For example, be careful not to discourage the person by demanding 100% accuracy, as this may tempt them to leave out items due to high uncertainty. Instead, encourage them to report their complete forecast and work on the accuracy later once you have some statistics available.

Selecting the forecasting solution

After the framework has been created, the business units will be able to provide timely and accurate cash forecasts even with the spreadsheet and e-mail combination, which still seems to be the dominant method for cash forecasting. While using spreadsheets does enable collection of the required data, in order to optimise this process, the cash forecasting system should also have the following characteristics:

  • The ability to provide the business units with supporting tools (e.g. pre-filled financial cash flows) that make the forecasting process as effortless as possible for them.
  • Easy integration into different systems (e.g. corporate TMS and bank balance systems) in order to automate the workflow and reduce errors.
  • Be auditable and transparent.

Bear in mind that deploying a cash forecasting solution does not necessarily have to be a time consuming and expensive system project. There are plenty of good web-based forecasting solutions that provide a service whereby the solution can be up and running in a few weeks.


Improving cash forecasting in large multinationals should not be a systems project. Start from where your efforts will reap optimal returns. By building a B2T bridge you can create a framework in which business units are capable of providing reliable and timely cash forecasts. The B2T bridge is a partnership with mutual benefits; the treasury provides business units with concrete work instructions and easy-to-use tools in exchange for up-to-date forecast data.

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