A Simplified Overview of Four Popular Approaches
Everyone agrees that cash flow forecasting is an integral piece of cash management, but not everyone agrees on the best way to create a forecast. Just as businesses vary across size and industry, forecasts vary in scope and approach; certain forecasting tactics are better suited to certain businesses.
If you are trying to find the best fit for your organization, we broke down four of the most popular financial forecasting tactics: straight-line, time series, qualitative and automated cash forecasting.
Straight-line Forecasting
Straight-line forecasting is fairly straightforward, which makes it one of the easiest ways to incorporate a forecast into your cash management process. While it does not take into account many of the variables that affect cash flows, this approach is great for businesses that are looking to create a budget and monitor spending. Due to its simplicity, the straight-line technique paints a more general picture of future cash flows. Financial Director recommends the straight line tactic “when a business is assuming revenue growth in the future.”
Time Series Forecasting
Time series forecasts are typically more involved and work to identify and extrapolate trends from historical cash data. This tactic can be used to help identify cash flow patterns attributed to seasonal, or cyclical trends, and paints a more detailed picture of future cash flows. However, time series forecasts require a lot of manpower and historical data to create. According to the Harvard Business Review, “These are statistical techniques used when several years’ data for a product or product line are available and when relationships and trends are both clear and relatively stable.” This technique is ideal for seasonal businesses as it can help the businesses anticipate peak season demand, and prepare for off-season expenses.
Qualitative Forecasting
Qualitative forecasts combine historical data analysis, research and expert opinion to provide a more well rounded forecast; this makes qualitative forecasts ideal for businesses with the resources to collect and analyze large amounts of data. The Delphi and market research models are two popular qualitative techniques.
The Delphi approach relies on surveying experts to gather information and make decisions. This can be particularly helpful when operating under new regulatory conditions or entering specific markets.
“If you’re looking for a long-term forecast and don’t mind investing the time and energy, this method delivers.” –FreshBooks
The market research approach is beneficial in situations where there is little existing cash data; this technique can be applied when opening a new store, exploring new markets or releasing a new product.
Automated Cash Forecasting
The newest forecasting approach is the automated cash forecast. This forecasting technique relies on APIs to collect cash data directly from banks, then applies AI technology to generate a forecast. Machine learning algorithms are also leveraged to identify and incorporate historical data trends into the forecast, improving its accuracy. Trovata’s automated forecasting system allows users to further customize their forecast by tying in data feeds from ERPs, Excel spreadsheets and other unique integrations. Automated cash forecasts are great for businesses looking to save time on manual workflows, and increase forecast accuracy.
Regardless of approach most manual forecasts involve a large margin of error. This is because most forecasting processes involve collecting and processing large amounts of data. These manual processes make it all too easy for numbers and formulas to be misentered in a spreadsheet.
Trovata’s automated cash forecasting system helps to eliminate much of the human error that plagues manual forecasting. Trovata allows its users to connect to their banks in minutes and provides access to built-in business intelligence tools to visualize, analyze, report, and reconcile cash flows.
Trovata provides better cash visibility with an all-in low lift and low-cost solution. Unlike other providers in the space, Trovata.io can be installed in a minimum of a few hours; contrary to legacy TMS, Trovata.io offers affordable set-up and maintenance fees.
To start creating your own automated, accurate and customized forecasts, visit Trovata.io.
