Cash Forecasting Best Practices and Automated Tools

cash management process: bank data feeds cash flow analysis & cash position which leads to cash forecasting

Cash forecasting, or cash flow forecasting, is one part of the financial practice of cash management. It is the most complex of the separate disciplines within cash flow management because it looks into the future and business bets are made using the data it foretells.

As much as we’d like to think otherwise, financial forecasting only works when you have accurate bank data and a thorough analysis based on present and historical transactions and cash positions.

To be done right, and to help accelerate a corporation’s growth, cash flow forecasting requires sophisticated tools to handle cash flow models and projections.

Cash flow: management vs analysis vs forecasting

Finance pros sometimes use these terms interchangeably, probably because they are inextricably linked to one another. Modern treasury management systems handle all of these functions separately, so it’s a worthwhile detour to lay out how these terms are different.

The difference in common cash flow terminology

cash management: all of the cash flow disciplines together. cash flow analysis: evaluates historical use of cash over time. cash forecasting: potential of future cash outlooks (modeled). cash position: today's cash on hand.

In this article, we’re focusing specifically on cash flow forecasting — leveraging historical data to look into the future with scenario planning, variance planning, modeling, and other cash forecasting tools within financial management systems.

How cash forecasting benefits your organization

An organization’s ability to manage its cash flow can make it either more resilient or more vulnerable to challenges. A good cash flow forecast could also provide evidence that your company is well-positioned to start a new project or make new financial commitments.

54% of finance departments still struggle to provide reliable data and reports to their stakeholders to inform business decisions

How to form a clear picture of your company’s financial health Cash Flow Analysis

Clear visibility into your company’s future financial position can help you identify risks to your business, such as over-estimates of revenue or underestimates of expenses. 

Example: a robust cash flow forecasting model can help you identify early warning signs of potential financial trouble, like the inability to pay employee salaries.

Example: weaker revenue than predicted could impact your ability to repay debts. Identifying the risks in advance can help you mitigate them. In this scenario, with clear insight into your cash flow, you might choose to delay expansion or cut down on expenses.

A subset of this is the cash conversion cycle (CCC). At its core, the CCC represents how well your business is managing its working capital. Shortening your company’s CCC is a fundamental part of forming a strong cash culture in your business, which can strengthen its resilience.

What to look for when analyzing your cash floIdentify growth opportunitiesw

Similarly, identifying cash surpluses helps you plan the best use for your money. You might invest in a new business project or leverage your cash to earn better returns.

Your liquidity management decisions are more effective when you make them in advance based on accurate predictions.

Many businesses grow through investment—in other words, through spending. Cash forecasts help companies plan their surpluses better so that they can grow in a more stable and predictable way.

Obtaining and managing debt

Lenders often want to see that you have a clear picture of your future cash position before they agree to give your company a loan. Robust cash forecasts can help them feel confident lending you capital.

Cash forecasting helps you plan debt better. First, it helps ensure you have cash available to make debt payments.

Second, it can help make sure that your company respects any financial restrictions placed on your company by your lender—for example, that you maintain a required minimum account balance. 

Cash flow forecasts can play a critical role in helping you identify threats to those restrictions. 

How cash flow forecasting works

Cash forecasting isn’t the same as budgeting. Budgeting helps you plan your resources and capital for a project or business group, but cash forecasting helps you manage cash inflows and outflows across the whole organization (and in smaller sections if desired).

A cash flow forecast is a report that predicts your company’s future cash flows—it estimates how much money will come in and go out during a given period. 

Cash flow forecasts come in different intervals, depending the way your business operates. Short term cash forecasts include daily, weekly, rolling 30-day, and rolling 60-day spans. 

The rolling 13-week forecast is the most common interval on an intermediate timeline.

Long term forecasts are usually rolling 12 or 24 months, but rarely longer because long-range planning is impractical in most industries. An exception to this is the five-year forecast in a business plan, but that’s less “cash management” and more “cash planning.”

A path to better treasury management and forecasting

Just as cash flow forecasting is valuable when done well, poor forecasts can lead you to make ineffective business decisions.

Here are some tips for ensuring your forecasts are accurate and useful:

  • Use accurate and current data. If you update your data manually, it could be prone to errors and quickly become out-of-date. In fact, IBM found that 88% of spreadsheets have at least one mistake. Avoid these errors by using open banking and bank APIs to automatically access your most recent cash data. 

  • Choose the right time frame. Short-term forecasts look ahead by 2-4 weeks and are typically better when day-to-day granularity is critical to meet financial obligations. Longer-term forecasts, like 13 week forecasts are better for preparing budgets and assessing long-term projects or growth strategies. 

  • Incorporate scenario planning. Unforeseen events such as COVID-19 have elevated scenario planning to be a must-have. Make sure to plan for a multitude of scenarios to be more proactive in assessing your capability to withstand disruption and the options you have to identify and respond to potential opportunities.

  • Use powerful models. Treasury management technology is more advanced than it ever has been. AI and machine learning algorithms produce extremely accurate forecasts, so take advantage of these features for the best forecasts.

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Cash forecasting tools

According to a recent study done by PWC (PDF download), the biggest challenge faced by Treasurers is cash flow forecasting.

The process for cash forecasting hasn’t changed very much over the past decade. In order to produce forecasting reports, Treasurers embark on an odyssey: logging in and out of several bank accounts, collecting data from multiple systems and departments, communicating with people at the corporate and local level, ultimately filling Excel spreadsheets with endless amounts of data.

It is striking that in the age of automation this tedious process is so widely accepted, and that the most popular cash forecasting tool is one that was released the same year that Coca-Cola released “New Coke”.

Why you shouldn’t forecast cash in Excel

Spreadsheets are a great tool, but their application in cash management is manual and extremely outdated. This is why, in the age of digital transformation, programs like Excel are being phased out in favor of automation technology.

The three biggest areas of concern for Excel’s use in cash management are: the visibility gap, user error, and inefficiency.

The Excel Visibility Gap

Spreadsheets create a visibility gap, which is essentially a blind spot in a Treasurer’s cash management.

A Boston Consulting Group survey found that, “Only 50% of bank Treasurers have daily insight into the entire banking book.” Meaning that 50% of Treasurers are left to play guessing games with their daily cash position.

Not having a solid grasp of how much cash is on hand leaves you susceptible to overdraft fees, bounced checks and could ultimately lead a business to failure

Spreadsheets Lead to User Error

In addition, the highly manual aspect of spreadsheets leave them vulnerable to user error. In the case of an Excel forecast, by the time an error is caught it is usually buried under layers of data across multiple spreadsheets, making the mistake difficult to find and correct

Management uses cash forecasting reports to predict future cash position and other pillars of financial health. In small and medium businesses (SMBs) and startups, minor errors in these spreadsheets can be catastrophic. 

According to The Telegraph, at the London Olympics a staff member erroneously typed “20,000” into a cell that should have stated “10,000”. As a result the London Olympic Committee oversold 10,000 tickets to four minor heats of synchronized swimming. By the time the committee realized their mistake, they were forced to upgrade the surplus ticket holders to major swimming events.

While it is true that all forecasts are subject to a certain degree of error, with digitization the level of human error can be significantly reduced.

Excel is Inefficient

Lastly, spreadsheets are an extremely inefficient method of cash management.

The Excel forecasts require an obscene amount of manpower and time. The data necessary to build a proper forecast is shared between multiple departments at corporate and local levels.

Coordinating between these departments is time-consuming and taxing. But wait, there’s more! Once all the data finally is located and compiled it must be standardized. For example, cash coming from banks in the United Kingdom and Italy would come in pounds and euros respectively.

These numbers would then need to be converted to a standardized currency.

A case study done by PWC found, “A Fortune 100 multinational implemented RPA to automate the daily cash positioning of their in-house bank and eliminate repetitive human input. This allowed the team to free up 1.5 hours a day for one person to focus on strategic projects and analyze investment decisions.”

The time taken up by data entry is time that could be used to analyze the results of these reports to plan for future cash position and strategy.

Despite its many flaws, most Treasurers utilize spreadsheets because their companies can’t afford a Treasury Management System (TMS). Traditional TMS involves an intensive multi-month integration and steep financial investment, leaving them out of the reach of SMBs and startups.

Treasury needs a tool that has the flexibility of Excel, but without the learning curve or expense.

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Why you should opt for an automated cash forecasting tool

Here are some reasons why a purpose-built cash forecasting software will result in better, faster, and more accurate forecasts than Excel — user-friendliness, fast scenario planning, automated variance reporting, ERP integration, and forecast roll-ups.

More User-Friendly. Automated cash forecasting software makes this easier by limiting your choice of options, providing a more straightforward and simple user experience and less avenues for making mistakes.

Fast Scenario Planning. Automated cash forecasting software allows you to create and manage many scenarios – key to running a modern treasury team and being able to withstand adverse events. 

Automated Variance Reporting. The most important, and ignored, area of cash forecasting is variance reporting. The reason: it’s time consuming. A forecasting software that can calculate these variances for you removes the excuse.

ERP Integration. Consider a forecasting software that supports ERP data integration, like AR and AP aging details. This will further improve efficiency and reduce manual efforts in Excel.

Forecast Rollups. Are you operating decentralized companies with entities all over the place? With software like Trovata, you can create a forecast for each entity or location. Then, with a few button clicks, merge those forecasts into one clean view of your global cash flows – all in one place.

Smarter Cash Forecasting is Within Reach

Using software that works for your treasury team is the best thing you can do to reduce manual efforts. Trovata helps companies like Krispy Kreme and Block (formerly known as Square) to automate bank data aggregation and analysis, saving their team 40+ hours a month.

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.

Spend less time on manual updates and more time making deliberate business decisions. See Trovata’s forecasting in action – schedule a demo today.

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