As our digital world has continued to evolve, the fundamental requirements of today’s treasury operations have remained consistent: knowing today’s cash position–and forecasting tomorrow’s as accurately as possible. While this is still a core requirement, many treasuries remain hindered due to the manual workflows required to build out essential cash management reports and forecasts that are necessary to keep a pulse on cash flow.
The 13-week cash flow forecast is one of the most critical operational reports when it comes to running your business because you never want to run out of cash. And while that sounds simple, it’s continually one of the reasons why most businesses fail within the first five years. Your company’s 13-week cash flow forecast ensures that you have enough cash on hand to cover operational expenses and to help you prepare for any unexpected scenarios that come your way.
Managing a 13-Week Cash Flow Forecast Helps:
1. Ensure Your Business Is Adequately Capitalized
The goal of managing a direct cash flow forecast is to ensure your business has the cash it needs to cover expenses for specific periods. 13-weeks is usually the standard as businesses want confidence in where their cash is being utilized across the entire business. This provides your organization the ability to quickly pivot and make more informed strategic decisions when new opportunities or threats arrive.
Knowing how much cash you need to meet your short-term obligations, such as payroll, payables, and tax obligations just to name a few, helps you be proactive with securing the right type of financing options to meet your business’s cash flow needs. Instead of being reactive and receiving high-interest, prime loans, you can be more proactive with your bank partners to receive term loans with lower interest rates.
2. Identify and Plan for Cash Shortages
Seasonality is something every business faces to varying degrees. With seasonality, cash gaps can become more apparent. Instead of facing these gaps as they come up, a 13-week cash flow forecast helps you spot these gaps before they have any effect on the business, empowering you to make informed, strategic decisions on how you can deal with this shortage before it hits.
These potential decisions may come in the form of holding out on acquiring certain equipment before cash clears, providing discounts to encourage clients to pay early, or obtaining short-term financing from your bank partners. Understanding your business’s seasonality alongside your typical level of cash reserves ensures that your organization can avoid catastrophic cash shortages and meet your working capital needs throughout the entire year.
3. Properly Allocate Cash Surplus
In some cases, you may find your treasury in the position of having a cash surplus. Perhaps all your clients have paid their invoices on time, your organization obtained a tax break that you weren’t expecting, or actual sales from the previous quarter exceeded projections. It is not always at your advantage to keep large cash reserves in low-earning accounts. Understanding when your organization may have a cash surplus through forecasting helps you make the best investment decisions possible and provides an opportunity to let your capital grow on its own, thus doing the work for you.
4. Plan for Different Scenarios
Geopolitical threats, navigating a changing economy, emerging growth opportunities, and the consideration of entering new market segments all bring unexpected changes in cash flow. Utilizing scenario planning within your cash forecasts can help your organization identify potential unforeseen circumstances into cash management plans that can be implemented quickly as these situations may arise.
Where to Begin with Building Your 13-Week Cash Flow Forecast
The fact of the matter is, treasuries that can analyze, report on, and forecast cash faster and more accurately than their competitors can better find growth opportunities hidden in their bank data and enjoy a lower cost of capital. Treasuries, like your organization’s, can accomplish this by digitizing operations with best practices for reporting and forecasting natively built into workflows and operations.
It’s critical to be mindful of the following when building out your 13-week cash flow forecast:
1. Define Your Strategic Objectives
Of course, the purpose of your 13-week cash flow forecast is to help your organization better understand what cash you are going to have at certain points throughout a certain period, but your forecast objectives may depend on your organization’s size, level of cash reserves, and your company’s strategic objectives. It’s critical to deeply understand your business’s short-term and long-term strategic objectives in order to tailor your forecast in accordance.
Having a deeper understanding of your organization’s strategic objectives is going to help you paint a picture of what your forecast requirements should be as the market is always changing. There are always one-off events that could occur throughout quarters such as acquisitions, share repurchases, or other events that can cause large fluctuations to cash outflows. Communicate with key stakeholders to understand when these unforeseen events could occur, so you can build your forecast to be agile and can accommodate these changes when necessary.
2. Avoid Creating Forecasts from Scratch Through Cash Automation
Managing a regularly updated forecast can be incredibly difficult when you are having to manually log into multiple bank portals and consolidate and normalize the bank before any meaningful analysis can occur. Modern advancements in open banking APIs have enabled treasuries to establish a Multi-Bank Data Lake™ within modern cash management platforms in order to achieve global cash visibility across all bank accounts.
Through our automated cash management platform, Trovata unifies all balances and transactions across all your global bank accounts, effectively establishing a single source of truth for all cash data. With an automated stream of bank data at your fingertips, you can empower your treasury team to automate tedious, manual workflows and prioritize strategic analysis.
Break Free From Prescribed Reports with Automated Cash Forecasting Functionality
In our next article, How to Establish a 13-Week Cash Flow Forecast, we’ll walk through the steps your treasury should consider to maximize the accuracy of your forecast. In the meantime, sign up for a personalized Trovata demo to discover how Trovata makes it easier than ever to automate your 13-week cash flow forecast with its comprehensive suite of automated cash reporting and forecasting functionality, powered by artificial intelligence and machine learning technology.
By automating the aggregation of your bank data with Trovata, you can easily eliminate tedious, manual workflows and gain visibility into cash reporting, forecasting. Empower your team to make more efficient data-driven decisions that propel your cash management strategy forward by speaking to Trovata today.