• david kelin

Does cash forecasting really matter?

Cash forecasting continues to be the one area that many treasuries struggle to do well. Treasurers often say that it is better not to forecast at all then forecast inaccurately. An inaccurate forecast has financial consequences – borrowing when you don’t need to or investing excess funds that you forecast but don’t actually have.

Given the low interest rate world we currently live in is another reason for not forecasting, after all those financial consequences may not be too bad. However low interest rates wont last forever and anyway isn’t it good practice to use as much cash in the organisation as efficiently as possible? In addition, we live in a world of increasing financial volatility. The risk is still there that market rates might fluctuate or the business environment makes a quantum shift or that geo-political events continue to influence economies hence business in a way that once thought unimaginable. It might even be something as simple as the CEO enquiring as to how much cash there will be in three months in order to fund a quick acquisition. The point is that treasury should know the answer or at least have an intelligent view on the matter. Having the right forecasting framework in place and the ability to forecast and reforecast the cash position quickly and with relative confidence is crucial.

So if you are now convinced that forecasting is necessary then what should you think about? At its most basic level forecasting is understanding the cash position of your organisation for given points in the future. Those points needs to be defined but could be three monthly, monthly, weekly, every other day, daily etc. This is something that your treasury needs to define but make sure periods used are meaningful rather than “doing it for the sake of it”. Forecasting takes effort so make sure it is useful effort. Forecasting also requires thought around forecast horizon and forecast granularity.

For companies that are cash poor or there is a potential of a covenant breach, the business will look to forecasting to provide an insight into the likelihood of the event happening. If forecasts are accurate then they can enable processes to be put in place that mitigate the potential problem and having the time to do this is so much better than getting a nasty surprise. Also, companies that have tighter cash margins tend to understand the importance of forecasting because they regularly have to think about volatility and possibly even survival. Here you tend to see a forecasting framework that is granular in nature and more regular because the business dictates it to be so.

There are three things that affect a good forecast – Reliability, Accuracy, and Methodology. Treasury is often dependent on other parts of the organisation to provide the forecast in the first place and they don’t always have control over how and when this is done. This can be a major issue, forecasts have to be reliable.

Accuracy is the second dimension. How accurate should forecasts be? 100%, 90%? To get 100% accuracy may seem an impossible task so many treasuries start at a level that is realistic and then seek to improve it as they become more confident with the forecast framework. The point is to start with something that is achievable then measure how to close to accurate the forecast actually was and then improve and get better.

Finally, the methodology or tools that used to forecast are vital. Making it easy to provide the forecasts and the ability to report the accuracy and reliability of them makes it easier to get buy-in from the entities within the organisation that have to provide the forecasts in the first place.

Accurate visibility of future cash flows provides many benefits to companies from reduced transaction charges through netting of flows to improved returns by taking advantage of interest curves. As mentioned previously there are other benefits too including giving management more time to identify cash management issues in the future and put in place remedial action.

So yes, cash forecasting really does matter.


Recent Posts

See All

Netting, What is all the fuss?

What is Intercompany Netting? Large, multi-national or multi-franchise, organisations have a number of operational subsidiaries who regularly do business with each other, leading to a complex, intra-g

00 44 7786 331313

©2019 by DNA Treasury Ltd. Proudly created with