Cash forecasting dominates treasury operations. But are you going about it the right way?

Andrew Burns, Director of Kyriba UK

Forecasting cash flows and availabilities is a key concern for treasury teams around the world. When done accurately and precisely, it provides companies with the strategic ability to anticipate available funds, and harness their cash efficiently to support growth.

If the data being used is wrong or incomplete, however, senior management is handicapped in their efforts to plan for the future and may find it difficult to manage volatility or turmoil in the markets.

Recent research has shown that more than 70% of treasury executives are involved in cash position reporting and forecasting – no other activity commands as much effort – and in many cases it can consume up to 50% of their time.

Worryingly, despite taking up so much time and energy, most treasury professionals consider their forecasts to be far from accurate. When 200 professionals were asked “how accurate is your cash flow forecast?” they provided the following responses:

• Highly accurate (almost no variance): 0%
• Accurate (some variance, but not significant): 32%
• Somewhat accurate (some significant variances): 53%
• Very inaccurate (major variances): 8%
• Variances aren’t analysed: 8%

It’s worrying that out of all of those surveyed, not one was prepared to say that their cash flow forecast could be described as “very accurate”. In addition, more than 60% of the respondents felt that their cash flow forecasts contained either “significant” or “major” inaccuracies.

With this lack of visibility of cash flows and future cash needs, treasurers can find themselves forced to rely on expensive contingencies instead. These can include, for example, using low interest-bearing accounts to store cash in the event that it may be needed, or relying on costly overdraft facilities for unforeseen expenses.

The wrong approach

For some treasurers, the problem with precision stems from the data they are using for their forecasts, as it is either out-of-date or faulty, thereby skewing the accuracy of calculations. To enhance performance, forecasts should be based on as close to real-time data as possible, pulled from multiple silos across the organisation, including invoicing, expenses and payments.

In addition, to improve the quality of their data, treasury teams need to resist the temptation of using spreadsheet solutions not initially designed for extensive and complicated forecasting. The danger of human error is omnipresent with spreadsheets, as operators have to manually transfer data out of them towards other internal systems, as well as external banking and payments systems. When added to the danger of data loss due to lack of systematic back-ups, treasurer teams would be well advised to seek out solutions that are fit for purpose and designed for forecasting.

In other cases, this lack of accuracy in forecasting is caused when well-meaning treasury teams try to combine treasury forecasting with financial planning – two very different approaches that cannot be merged without creating problems. The issue is that financial or budgetary planning uses hard data taken from bank balances, cash flows and accounts payable, and then mixes it with less precise data used for planning, with the aim of supporting strategic planning. While it is useful, the data generated is not granular enough, lacking essentials such as precise timings for payments, making it impossible for treasurers to use it to manage short-term liquidity.

Technology holds the solution

With the constant evolution of technology, treasury teams can now call on sophisticated and effective Treasury Management Systems (TMS) to support their cash forecasting needs.

These new systems can be plugged in across the organisation, and can also communicate automatically with third parties such as banking partners, allowing quick and easy management of bank accounts. A powerful TMS can pull real-time data from all relevant elements of the organisation’s financial ecosystem, calculating comprehensive overviews of cash positions and providing real-time visibility of all payments and collections in process.

This data can then be combined with information on the full range of payables and receivables held within an organisation’s ERP and accounting systems. As a result, the treasury team can generate best-practice cash forecasting and in the process support their company’s senior management in planning and driving growth.

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