Cash Forecasting Best Practices

Written by Kalei White
November 29, 2022

An essential yet tricky part of cash management, cash flow forecasting helps set the trajectory for future business operations. Being able to predict your cash inflows and outflows means you can more accurately plot your company’s way forward.

With insights into cash flow projections, you can be mindful of when you’ll be cash-flush or where cash flow might run thin so you can better plan potential investments or loans. 

Here are three of the most common pitfalls to avoid and eight cash forecasting best practices to level up in this key area of cash flow management.

3 Cash Forecasting Pitfalls

1. Garbage In. Garbage Out.

Did you know that 88% of spreadsheets contain at least one error? Manually aggregating your bank data and ERP into Excel spreadsheets doesn’t only increase the risk of human error but is also incredibly time-consuming.

Before any meaningful analysis can occur, it’s important to address and fix any errors in your data. If not, you could be in a decision-making situation where you rely on inaccurate and misleading data, leading to poorly projected future cash flows. 

Recommended: Guide – 10 Ways to Increase Forecast Accuracy

2. Managing Your Forecast Baseline in Spreadsheets

If you are currently managing your forecast in one spreadsheet, and regularly overwrite your baseline forecast with your actuals, you won’t have enough information needed to analyze your forecast’s accuracy.

And while it is good practice to make a copy of your forecast baseline for any given period and keep it in a safe place, there’s still the issue with version control. Working for a larger team with many members, it can become increasingly difficult to know if the version of the cash forecast you are working with is the most up-to-date and accurate.

3. Prioritizing Perfection Over Analysis

While ensuring your organization has confidence in your forecast is critical, trying to create a perfect forecast is not sustainable. Even if you have the most accurate historic bank data to craft your forecast, many one-off events could potentially pop up, resulting in cash shortages.

For example, many local businesses across the world experienced an unforeseeable shortage event with the COVID-19 pandemic. Due to this, they had to change their pricing and their cash forecast on the fly.

What is more critical is to prioritize a mix of accuracy, analysis, and efficiency in order to create a forecast that is within your organization’s risk tolerance, and can be agile enough to address any financial obstacles that may come your way.

8 Cash Flow Forecasting Best Practices

1. Know Which Period Your Cash Forecast Is for

The period of time for your forecast plays a significant role in the eventual outcome of your cash allocations. Determine whether the forecast is short-term for daily cash flow planning or long-term for funding or investment rounds. 

Popular cash flow periods include: 

  • Weekly, 30-day, or 60-day: Short-term forecasts are usually for internal use to determine the possible cash forecast with as few variables as possible. 
  • 13-weekYou would use this cash forecast to determine the inflows and outflows over a rolling 13-week period, which means that as one period finishes, the next begins. In other words, the forecast is always up-to-date. 
  • Rolling 12 months: Possibly the most popular cash forecast is the rolling 12 months, which provides businesses with enough insight into the company’s financial future based on past performance. This cash forecast often allows businesses to make decisions about medium-term commitments like equipment finance. 
  • Beyond 24 months: Businesses typically have a five-year cash forecast as part of their business plan to track progress and measure growth. Investors and lenders might require this to see the potential profits before investing or funding. 

2. Streamline Your Forecasting Through Automation 

Manually gathering information for forecasts is possible. You would collect information from various sources like bank accounts and cash reports and then feed it into a manual document, like a spreadsheet. However, that process is often slow and prone to errors. 

A better option is automation. 

Trovata uses automation to download real-time information from various sources. Machine learning then uses the patterns in your financials to create reports and cash forecasts. 

For Antonio Chavez, Treasury Information Analyst at The Biltmore Group, the process previously took hours. Now it just takes minutes. 

“Since all the data from the bank portal is flowing to Trovata, creating a report with the software takes minutes instead of hours. As long as you have the proper tags in your transactions, then creating a forecast or creating a report won’t take a long time.”

– Antonio Chavez, Treasury Information Analyst at the Biltmore Company

This type of automation also ensures that the information is error-free and less prone to data gaps. 

3. Leverage AI in the Forecasting Process

To further level up your cash flow forecasting, look for automation tools that offer templates using AI and machine learning algorithms. These tools can utilize your historical data with ease to inform its analysis.

Machine learning and artificial intelligence also help automate the generation of your forecast baseline, amplifying your ability to perform meaningful analysis.

Trovata not only helps you generate an accurate forecast baseline for any time period, but also provides you with robust forecasting tools like scenario and planning capabilities.

With any generated forecast, you have the flexibility to model and forecast around different business decisions and potential investments with enhanced user-defined growth rates and variables, enabling you to identify cash shortfalls ahead of time before committing to any decisions. You can prepare your team for any disaster scenarios, making sure to have enough cash on hand and easily articulate solutions with key stakeholders.

4. Forecast Potential Market Swings   

Cash is a vital part of keeping businesses going when times are tough, but it’s hard to prepare for these times when the forecasts are always based on cash-flush positions. Instead, include diverse market situations like economic downturns to better prepare for possible negative cash flows. 

Don’t forget to account for seasonality as well. If you see a dip in sales at the end of the year, ensure your forecast reflects that.

Make sure to follow trends and news about your industry’s supply chain. Monitoring the health of your supply chain will also provide key info to inform your cash flow forecast.

4. Create Consistent Reporting 

For treasurers, it’s easier to create accurate forecasts when you know the forecasting schedule. Consistency ensures you’re always on top of your forecasting game, as you have continuous cash forecast schedules. 

It’s also important to note that the quality of the data will also determine the accuracy of the reports and forecasts. Even when using cash forecasting software, you still need to do some of the legwork to ensure the output is what you need.

 Garbage-in-garbage-out might seem like an archaic reference. However, when it comes to financial data, it still stands. The better you categorize and label the information, the more reliance you can place on your reports.

5. Focus on Working Capital 

Working capital provides the cash to meet your short-term financial objectives. Without working capital, it’s hard to meet obligations such as bill payments, salaries, stock purchases, and other cash outlays required in the daily running of the business. Cash forecasting should highlight areas that free up cash to meet these obligations. 

For instance, if you tie all the money into long-term projects like investments, the business can become cash-poor, leaving you to rely on working capital. While this is a short-term solution, it’s also expensive and can cause financial hiccups if there’s no long-term plan to increase working capital. Accurate cash forecasts will reveal if this is bound to happen. 

7. Review Your Cash forecast at a Regular Interval

As we’ve seen, the market is always changing, which in turn can facilitate the need for strategy changes. For this reason, your cash forecast is not a one-and-done type of situation.

There are always one-off events that could occur throughout the quarter that can cause large fluctuations in cash outflows, so by regularly reviewing your forecast and performing variance analysis, you can better understand how certain changes in the market or the business can influence cash flow before it happens. 

8. Allow Open Discussions 

A cash forecast is more than just a prediction about future finances. It’s also a working document that allows finance and treasury teams to make strategic decisions, navigate a company’s financial situation, and make adjustments to create the best possible cash flow for the business. 

This means financial teams should provide input into the cash forecast findings and steer the finances in a direction that will meet short-term and long-term financial needs. 

Regularly communicate with your CFO and key stakeholders to understand when one-off events could occur, so you can build your forecast to be more agile when cash shortfalls occur.

Aligning everyone regarding your organization’s liquidity management ensures that leadership can create obtainable strategic objectives and make wiser investment decisions for the organization.

How Trovata Can Help You Build a Robust Cash Forecast

It’s not easy to create the perfect cash forecast, especially if there’s more than one inflow and outflow of cash. Cash management software like Trovata can transcend these difficulties and help you create accurate and adaptable cash forecasts to your business’s changing conditions, needs, and inputs.

Trovata uses machine learning to generate and visualize your cash forecasts. It uses your data streams, tags, labels, keywords, filters, and other indicators to customize your forecasts according to your business needs. With automation software, your bank data automatically downloads into Trovata’s dashboard. While this kind of data collection and normalization usually takes hours, Trovata does this in minutes. 

Furthermore, centralizing all your banking data allows you to generate global cash forecasts across accounts and subsidiaries. 

To see Trovata in action, check out our step-by-step guide on building a 13-week forecast

how to build a 13 week cash forecast 6 steps bottom

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