The Value of Cash Forecasting in Today’s Economy

Written by Keegan Chamberlin
May 20, 2022

The big buzz within our economy is that many institutions and former US treasury secretaries are predicting a recession in 2023. The reason for this, which former Treasury Secretary Lawrence Summers spoke to in a recent Washington Post op-ed, is due to high inflation and a lower unemployment rate.

“Over the past 75 years, every time inflation has exceeded 4% and unemployment has gone below 5%, the U.S. economy has gone into a recession within two years.”

– Lawrence Summers, Former US Treasury Secretary

In April of this year, the annual inflation rate reached 8.3%, a level unseen since the 1980s. And the unemployment rate was 3.5%, the lowest it’s ever been since 1969. Summers wrote, “Over the past 75 years, every time inflation has exceeded 4% and unemployment has gone below 5%, the U.S. economy has gone into a recession within two years.”

On top of a potentially looming recession, rising interest rates, and the war in Ukraine, there’s uncertainty in the market, but that doesn’t mean there are no opportunities for growth. While recessions can be scary, they also can bring many other opportunities, like lower fees for advertising and providing an opportunity to seek out operational efficiencies.

The fact is that the key to minimizing threats in a recession is to be proactive instead of reactive before a recession occurs, so you can have proven strategies ready to be deployed at a moment’s notice. Your cash management strategy should equip you with opportunities to grow, despite potential market changes.

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Why Accurate Cash Flow Forecasting Is Critical For Growth

Let’s remember back to the beginning of the COVID-19 pandemic. In early March 2020, we all experienced our world shut down quickly in ways we’d never expected. Many businesses suddenly found themselves in a spot where they had to adjust their sources of revenue, and figure out how they could increase efficiency to  cut costs. Simply put, organizations that did not have a real-time view of their cash flow struggled, with many having to, unfortunately, resort to layoffs, or even closing their doors.

You have to be able to adapt your cash management strategy at the flip of a coin when potentially devastating market conditions could arrive at your door. You must have contingency plans for any threat that comes your way. Unfortunately, this can be incredibly time-consuming to implement, especially if you are part of a small team. 

Managing cash in spreadsheets automatically sets you up with a disadvantage. You want to perform any scenario analysis or forecasting, you have to start with a clean set of data every time. This involves you going to every single one of your bank portals, consolidating your transactions and balances, and placing them in one spreadsheet, hopefully without any errors. There’s a better way to forecast cash flow.

Fortunately, incredible advances have occurred within cash management in the last few years that empower treasurers to digitally transform their cash processes such as open banking APIs.

The digital transformation of cash management has enabled many organizations to better automate their cash reporting, analysis, and forecasting, as well as payments processing and money movement. By establishing a single source of truth for your cash balance and transaction data with banking APIs, alongside robust reporting and forecasting automation tools, you can eliminate manual processes and perform rapid, strategic decision-making with real-time visibility. 

With this new level of cash forecasting capabilities, it becomes critical that your forecast is accurate and built with real-time data, so you can proactively identify potential growth opportunities and threats before it’s too late to act on them. 

Increasing the Accuracy of Your Cash Flow Forecast

Automate Your Starting Point With Open Banking APIs

Before you begin forecasting, it is critical to automate your starting point with open banking APIs. If your data is not accurate, your forecast isn’t going to be either. By gathering your different data sources manually, you are increasing your risk for error. By automating bank data aggregation with APIs, you can ensure your organization has access to not only quality bank transaction data, but also metadata, including closing valuable, current available, and open ledger. 

With data flow being automated through a cash management platform, you can change your data management to cash analysis ratio from 80/20, to 20/80. With more time for analysis, you can spend more time discovering rich cash flow insights.

These insights go a long way in helping your organization make informed decisions.

Augment Historical Data With AR/AP and Known Events From Key Stakeholders

Your organization’s historical bank data doesn’t tell your entire cash story. By incorporating your key stakeholders and leadership within the forecasting process, you can begin to incorporate one-off events, such as acquisitions or expanding into new markets, and improve collaboration between departments to increase forecast accuracy and make more accurate, data-backed decisions as a team. 

You must also incorporate your account receivables and payables to get a complete view of your cash flow. With Trovata’s API Bank Connector™, your organization can share bank data and AR/AP data between their Sage products and Trovata Platform.

Trovata’s API Bank Connector™ empowers Trovata users to:

  • Automatically pulls open invoices, unpaid CC transactions, unapplied payments, and unpaid bills data from Sage via APIs into their Trovata instance
  • Generate a consolidated A/R and A/P Aging report within Trovata from Sage financial data

This way, you can ensure you have complete visibility into your cash flow, which will make your cash flow forecast more accurate over time. 

Maintain a Forecast Baseline to Perform Accurate Variance Analysis

You simply cannot determine the accuracy of your cash forecast without establishing a baseline. With that baseline, your organization is able to compare your baseline forecast with your actuals to determine the variance between them.

Variance analysis helps you:

  1. Determine How Accurate Your Assumptions Are. By comparing your cash actuals in week two, for example, compared to what you planned for in your baseline forecast, you can calculate a percentage of the difference between them. Perhaps, by week 8 out, you find that, on average, your forecast is 80% accurate. Through understanding the accuracy, you can dig further into your cash flow to discover in-flows and outflows you didn’t take into account.
  2. Provides insight into what actions created positive outcomes. By helping you identify the differences between your baseline and actual forecast, you can begin to piece together how to increase the accuracy of your forecast and replicate future actions that have a net positive on cash flow.
  3. Builds proactivity into your organization’s processes. Performing variance reporting helps build a culture around making more data-driven decisions. By making variance reporting a part of your weekly operations, you can continually build analysis into your cash management processes and begin to form a feedback channel between your treasury team and leadership.

Establish An Automation Baseline for Scenario Planning

Through establishing an automation baseline throughout your cash flow forecasting processes, you can begin to perform scenario analysis to determine how market changes, either positive or negative, can affect your company’s cash flow.

Scenario planning transforms unforeseen circumstances, such as a decrease in revenue or increase in expenses, into contingency plans that can be implemented quickly as these situations arise. With the time it takes to do this manually, your data would already be outdated before you create multiple scenarios.

Fortunately, Trovata allows you to apply growth rates and variables to your automated forecasts, empowering you to quickly and accurately forecast around changing scenarios, business decisions, and potential investments. 

Now you can be prepared for any disaster scenarios and growth opportunities that arrive at your organization’s door.

A Baseline of Automation is a Must for Accurate Cash Forecasting

Think of the baseline of automation as what is giving you the building blocks for visibility, and growth, whether we are in good or bad economic times. Forecasting accurately ensures that you can take advantage of growth opportunities, even if a recession were to occur in the future.

Simply put, businesses that can analyze, report on, and forecast cash faster and more accurately than their competitors have a significant advantage and better cope with an economic downturn.

With Trovata, you can effortlessly establish a baseline of automation to easily automate your cash reporting, forecasting, and analysis, as well as payments and money movement. You can start to prepare for any scenario, and successfully minimize risk, even if a recession does land on our door.

Download Trovata’s 13-Week Cash Forecasting Guide to see how you can easily generate an accurate cash flow forecast. 

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