With the foundation of your direct cash forecast now built, it’s equally as important to optimize your cash forecast overtime to ensure overall accuracy continues to increase. By considering the following pitfalls and implementing these cash forecasting best practices, you can design cash buffers as well as uncover early warning signs of potential cash shortfalls.
Cash Forecasting Pitfalls to Avoid
1. Garbage In. Garbage Out.
Manually aggregating your bank data into spreadsheets doesn’t only increase the risk for human error, but is also incredibly time-consuming. Forecasting errors begin to arise that must be addressed and fixed before any meaningful analysis can occur. Or, you could find yourself in a situation where you are making decisions based on inaccurate and misleading data.
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 it is critical to ensure your organization has confidence within your forecast, trying to create a perfect forecast is not sustainable. Even if you have the most accurate historic bank data to craft your forecast from, there are still many one-off events that could potentially pop up that could cause cash shortages. For example, many local businesses across the world experienced an unforeseeable shortage event with the COVID-19 pandemic and had to make changes to 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.
Incorporate These Cash Forecasting Best Practices
1. Automate Your Cash Forecast’s Starting Point with Open Banking APIs
What often prevents treasurers from performing more meaningful analysis is time-consuming, manual data management. Open Banking APIs eliminate tedious, manual data management by establishing financial rails that bring in your historical bank data into an automated cash management platform, like Trovata. Machine learning and artificial intelligence then analyze this data and normalizes it, so it can be utilized easily to generate cash reports and forecasts. Trovata stores this data in perpetuity, empowering you with the most up-to-date, and accurate bank data to base your forecasts on.
Machine learning and artificial intelligence also help in automating 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 and easily articulate solutions with key stakeholders.
2. Maintain a Forecast Baseline to Perform Accurate Variance Analysis
Instead of having to worry about version control across your team, Trovata automatically saves and maintains your baseline forecast for any forecasted period of time. Even if you are performing extensive scenario planning or making any customizations to your forecast, your baseline forecast can be referenced at any time.
With automated variance analysis tools built-in, you can determine your forecasts’ accuracy at any point of your forecast, making it easier to identify trends and make more informed, strategic decisions. This level of automation allows you to focus on analysis, decision-making, and execution, so you can strengthen your cash flow management strategy to weather any financial obstacles that may arise.
3. Review Your Cash Forecast at a Regular Interval
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.
Secondly, regularly communicate with key stakeholders to understand when one-off events could occur, so you can build your forecast to be more agile when cash shortfalls occur. Ensuring everyone is aligned regarding your organization’s cash flow expectations ensures that leadership can make sure their strategic objectives are obtainable and can make wiser investment decisions for the organization.
Break Free From Manual Forecasting With Automated Cash Management
Trovata, our automated cash management platform, is built with reporting and forecasting best practices in mind. By automating the aggregation of your bank data with Trovata, you can easily eliminate tedious, manual workflows and gain greater visibility into your cash reports and forecasts.
Speak to Trovata today to empower your team to make efficient, data-driven decisions that propel your cash management strategy forward.