It is difficult to overstate the advantages of cash flow forecasting, as forecasts are an integral piece of the cash management puzzle. Cash forecasts empower businesses to better understand their cash flows and prepare for potential problem areas before they arise.
The Top 4 Advantages of Cash Flow Forecasting
Identify and Plan For Cash Shortages
Having an effective forecasting process can be crucial to the success of a business, especially in times of uncertainty. An organization’s ability to navigate through significant instability can catalyze long-term financial health.
“A cash-flow forecast model serves as an early warning sign to a company’s future business health by putting a forensic lens on cash balances under a variety of future circumstances.”– CFO.com
Cash forecasting has never played a more critical role in the fiscal health of a business. As we saw with the impacts of COVID-19 and recent economic uncertainty, businesses often operate with little margin for error. Accurate cash forecasts can enable your business to anticipate potential cash gaps and avoid missed payments.
Cash flow forecasts give businesses the foresight to implement corrective actions like fine-tuning payment and collection strategies, liquidating assets, or reaching out to lenders. In addition to helping mitigate the impact of a cash shortage, forecasts can help predict a surplus.
Properly Allocate Cash Surplus
Businesses rarely benefit from having lots of stagnant cash on hand. Forecasts can help identify a potential surplus and allow cash managers to allocate excess cash efficiently.
“A similar exercise to minimizing the cost of funds; knowing that a surplus will occur in advance enables the cash manager to look for the most effective ways to invest funds.”–Treasurers.org
Whether businesses invest or use excess cash to create a competitive advantage, they must leverage forecasts and put surplus cash to work. As businesses look to allocate excess cash, scenario planning can help forecast the impact of specific investments or decisions.
Use Scenario Planning To Answer ‘What if’ Questions
Scenarios are a powerful tool in the strategist’s toolkit since they’re are instrumental in developing strategies to navigate the rare events we have recently seen in the world economy.
“Scenarios enable the strategist to steer a course between the false certainty of a single forecast and the confused paralysis that often strikes in troubled times.”–McKinsey & Company
Scenario planning becomes especially useful in the case of automated cash forecasting. Often businesses do not have the personnel or resources to create tailored forecasts due to the manual workflows required. Apps like Trovata utilize bank API connections to automate the data collection and tedious manual workflows associated with data analysis before meaningful scenario planning can occur. These carefully crafted forecasts can be used to prepare for everything from supply chain disruptions to managing an enterprise’s cash and liquidity.
The ability to quickly design and generate targeted forecasts allows businesses to project the impact of decisions and the potential value of investments before they are made. Scenario planning can be used to answer all of your team’s “what if” questions. Will we be able to pay creditors and employees? What are our operational expenses? How can we optimize our use of cash? All these questions can be answered by running these scenarios, and seeing how they can affect your cash flow over time.
Manage FX Risk
When it comes to managing and mitigating the risk associated with foreign currency, having a reliable forecasting process is key. Forecasts allow cash managers and treasurers to anticipate cash needs and reduce the need for foreign currency transactions. Essentially, a cash manager’s primary role is to provide the company with sufficient liquidity to enable the functioning of the company’s operations.
“When assessing potential surpluses and deficits of cash, it is necessary to assess not only amounts and currencies, but also the periods for which the surpluses or shortages will arise. Some companies build in a cushion into their calculations in case of unexpected cash calls.”– Treasurers.org
Forecasts help businesses better understand their exposures and create a plan for mitigating FX risk.
How Do I Get Started with Cash Flow Forecasting?
While creating or improving a cash forecasting process may seem overwhelming, Trovata makes it simple. As an automated cash management platform, Trovata uses machine learning and AI technology to eliminate many of the manual aspects of cash forecasting.
Check out our 13-Week Cash Forecasting Guide to learn how to create an accurate forecast, improve accuracy with variance analysis, and run different scenarios so you can prepare for the unexpected.