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Cash Forecasting is more than just using the right software

Updated: Jun 25




David Kelin – June 19 2020


I recently chaired a roundtable discussion on Cashflow Forecasting for Analyste. Our group was a cross section of Treasury professionals drawn from many industry segments and companies of different sizes. They all had one thing in common; an objective to improve their cashflow forecasting.

Of the many interesting themes to emerge, one which really got my attention was the struggle that many companies have in getting their businesses to sign up to providing cashflow information in a reliable, consistent and accurate manner. I will come back to this later but to set the context let’s start with the premise that good cashflow forecasting is important for a business.

According to the Office of National Statistics (ONS) in the UK, 90% of businesses fail due to cash flow issues. Sir Richard Branson summed it up very well when he said “Never take your eyes of the cashflow because it’s the life blood of the business.”

Cashflow management is crucial for a business and good decisions to maximise cashflow helps organisations ensure that they are adequately equipped to navigate times of uncertainty and plan for the long-term. Focussing on cashflow rather than profit is what successful businesses do. It could be thought of in this way: A profit-making business that does not manage its cash flows effectively can struggle to pay its suppliers resulting in delays in supplying its customers. The end result will be unhappy suppliers, lost customers and a negative impact on profits.

So, if we agree with the premise then why is cash flow forecasting such a headache for many businesses? This is the sentiment that I heard at the roundtable discussion and often hear when I talk with other treasury groups.

When we explored this there was broad consensus that cashflow forecasting is only as good as the data it comprises. The old adage of Garbage In, Garbage Out (GIGO) is true for cashflow forecasting. Inaccurate data leads to inaccurate forecasting.

So data is important. But, data can come from many different sources, for example, the P&L, ERP systems, payroll etc. These data sources tend to be reliable in that they reflect known activities however as a panel member pointed out. “Relying on data that is derived from the P&L alone to produce the forecast does not lead to accuracy. You must also get the business units to provide and update cashflow forecast data in order to complete the picture.”

Getting the businesses to provide data is the hard part of the process but there are some guidelines to make this successful:

1. Get senior management buy-in for the cashflow forecasting process. The panel was agreed that it is not enough for Treasury to simply tell the businesses to provide accurate, timely and reliable data. The request should be endorsed by senior management and be communicated by them to the business units.

2. Communication, communication, communication. The business units must also buy-in to the process. Those companies who are most successful in this process agree that when business units understand the importance of good forecasting they tend to do a better job of providing quality data. A good example of this was made by a panel member: “We meet with our business units on a regular basis to explain why we ask them for cashflow forecast information. We always say that poor cash forecasting affects our bottom line. If you get for forecasting wrong then your exposures are wrong, then you hedging is wrong and this leads to potentially an FX loss which affect the P&L.” Another treasurer explained this further; “The best business units are those who have bought into the forecasting process and understand its importance to the whole organisation. They take pride in providing accurate data in a timely manner. This behaviour doesn’t happen overnight but as a result of a change in the company culture which they have bought into. Cash flow forecasting is now part of our Key Performance Indicators (KPI’s).”

3. The right tools for the job. Getting buy-in from business units takes more than just communicating with them. Panel members were clear that you need to make it easy to supply the forecast information by giving them the right tools. Excel is an obvious tool of choice but not always the best one. Spreadsheets are prone to error and need to be consolidated at treasury. This is all time consuming and not user friendly. In addition, there is a limit to what you can do with the data and comparisons between forecasts, variance analysis, what-if scenarios etc are all difficult or impossible. A specialist cash forecasting system which allows the business units to input or update the data in an easy way was seen as a huge step forward.

In summary cashflow forecasting is a crucial activity for treasury departments everywhere but to do it well you need ensure that the entities supplying the information have bought into the process and are provided with the best tools for providing it.

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