Complimentary E-Book

Improving Cash Projection Accuracy using Micro-Cash Analysis

Improve the accuracy of your cash projection reports by leveraging AI to predict invoice level delinquency of your outstanding receivables

CHAPTER 01

Cash Flow Projection : Definition, Stakeholders and Goals

What is Cash Flow Projection?

A cash flow projection is an estimate of the amount of money you expect to flow in and out of your business over a particular period and includes all your projected income and expenses. A forecast usually covers the next 12 months, however it can also cover a short-term period such as a week or month. It estimates an organization’s future financial position based on anticipated payments and receivables.

Purpose and Stakeholders

  • Treasury Department
  • AR Credit and Collections Team
  • CFO and other Executives
  1. Cash flow forecasts could help to predict upcoming cash surpluses or shortages to help you make the right decisions. It could help in tax preparation, planning new equipment purchases or identifying if you need to secure a small business loan.
  2. Cash flow forecast could be used check if your business is meeting your expectations. Comparing your actual income and expenses with your forecasts can help to proactively identify and rectify under performing areas/functions. Reviewing your actual performance against your forecasts alerts you to any variance so you can investigate and find out why there is a difference.
  3. It could be used to evaluate an upcoming business change or decision. If you’re considering hiring a new employee for example, you’d add the additional salary and related costs into your forecast. The new figures in your cash flow forecast will tell you whether hiring that additional employee is likely to place your business in a stronger position and help you decide whether to hire them or not.
  4. Including best, worst and most likely case scenarios allows you to see how your business will fare if you suddenly hit tough times or better than expected trading conditions. Knowing how this effects your cash position allows you to make informed and educated decisions, and you’ll be more confident of running your business.
CHAPTER 02

How to Build A Cash Flow Projection Report?

In larger companies, the management of a cash forecasting process is controlled by the head office treasury or finance team. The work to be done in terms of assembling a forecast position generally involves sourcing data from both systems and people. The easiest way to prepare a cash flow forecast is to break the task into several steps. Then bring all the information together at the end.

Typically, cash flow projection can be broken down into 5 simple steps as follows:

Prepare A Sales Forecast

For existing businesses, look at last year’s sales figures and make adjustments based on past trends, such as increasing or decreasing, or flatlining sales growth.

For new business, when you prepare your cash flow forecasts, start by estimating all the cash outflows. This gives a rough idea of the amount of cash that needs to come in to cover the cash going out, and therefore what sales you’ll need to make

Estimating Cash Inflows

Sources of cash inflows vary from business to business such as:

  • GST rebates and tax refunds
  • owners invest more money (add extra equity) in the business
  • government or other grants
  • loans are paid back to you or you sell an asset
  • other sources such as royalties, franchise fees, or license fees.

Gather Details and Prepare Cash Flow Forecast

The period to be covered in the forecast is decided early on. Since cash flows are all about timing and the flow of cash, businesses would need to have an opening bank balance (i.e. actual cash on hand), add in all the cash inflows and deduct the cash outflows for each period, usually by month. The number at the end of each month is referred to as the closing cash balance and this number becomes the opening cash balance for the next month.

Review: Estimated Vs Actual Cash Flow

This is the most important step of all. Once cash flow forecast is done, revisit and compare the estimated and the actual cash flows for the period. This helps to highlight any differences between estimated and actual cash flow, and further helps to understand why your cash flow didn’t meet your expectations.

 

CHAPTER 03

Cash Flow Forecasting: Failures and Cause Analysis

Ensuring accurate cash flow projection is no mean feat! As per a survey by Kyriba, Six in 10 treasurers think that their cash flow forecast has either “significant” or “major” inaccuracies. The consequences of this lack of accuracy can’t be overly emphasized, and can cause a company to require a lock up huge reserves of cash. When many millions or billions of dollars are at stake, this lack of cash visibility can have a dramatic impact on how much “idle” cash an organization is forced to have on hand, to cover for unknown cash needs. The knock-on effect from this is that a company’s cash can’t be used optimally, for instance, for paying down debt or funding growth or M&A initiatives.

The following enlists the 4 primary causes of the same:

Use of Antiquated Systems

Despite the potential for error, the majority of treasurers continue to rely on Excel spreadsheets for their forecasting requirements. Some companies opt to develop their own cashflow forecasting tools based on existing systems. However, that needs extensive IT resource investment. Even with a straightforward system, another key challenge is to ensure adequate training to the staff.

Incoming Receivables Based on Static Assumptions

The Credit, AR and Collections teams use static estimation metrics such as average days delinquent (ADD) and consider other static factors such as customer type- large or small, payer type- regular, fast, or slow to predict the payment date for each customer. However, ADD does not give a dynamic picture of customer payment behavior.
Cash inflows are added to the projection based on these payment date predictions. As a result, inaccurate data on incoming receivables based on static assumptions leads to inaccuracies further trickling down into the cash flow forecast.

Misleading Averages

Basing your cash flow forecast on an average estimate of can come back to bite you if that average suddenly changes. For instance, in AR, when a customer takes 29 days on an average to pay, after being invoiced and then suddenly begin stretching payments to 45 days, it can hit the business’s cash account pretty quickly.

Disparate Data Sources

One of the keys to creating accurate cash flow forecasts is having historical data about revenues and expenses. Furthermore, having enough historical financial data to capture the effects of seasonality (such as inventory purchases ahead of a busy season) and occasional uses of cash (such as ad campaigns) provides a clear pictures of expenses. However, businesses typically do not have a centralized repository to store all the information. Data integration is a critical pain-point in cash flow projection.

CHAPTER 04

Eliminating Inaccuracy Using Micro-cash Forecasting

Advancements in technology such as predictive analytics enable payment pattern-analysis to be performed at an invoice line item level allowing for micro-cash forecasting and a drill-down visibility to customer segments, individual customers and invoices.

The power of historic customer data is harnessed from multiple sources, to predict, the likely payment dates across all invoices thereby being able to project with increased accuracy, the possible cash inflows for the future. The real power comes in bringing together data (e.g. big data and data warehouse) into one centralized repository.

Analytics derive their outcomes from extensive mathematical modeling and computations utilizing advanced statistics and machine learning. They provide us with sophisticated visualizations that open up a world which allows us to understand patters and generate accurate cash projections. Today’s spreadsheet forecasts only provide single-source, two dimensional tabular reports on current period information

“Micro-cash forecasting leverages AI to gain 360 customer view and predicts possible payment delays at an invoice and account level”

  • Better intelligence brings better accuracy
    With the help of predictive analytics, treasurers could drill deep down into customer payment behavior patterns, and predict accurately the cash inflows based on  predicted payment dates.
  • Real-time forecasting
    If your business is facing a turbulent time financially, updating the cash flow forecast daily can help you to identify new threats in advance. Predictive enable digitizing and speeding up many of the tasks that are involved in planning your company’s cash requirements.
  • Channel Your Team Efforts In Right Areas
    Line item level forecasting enables you to predict futile cash collection efforts and lets you channelize your team’s effort on high-yield actions.

 

CHAPTER 05

Benefits of Cash Flow Forecasting at Various Levels

CFO Level

An effective cash forecast directly impacts many key performance indicators that CFOs and senior finance executives regularly measure, and on which they are themselves measured, from return on investment and cost of funds through to liquidity and solvency ratios, cash flow and working capital metrics, amongst others. It is therefore in every CFO and senior finance executive’s interests to ensure that treasury is equipped to produce the most accurate, complete and timely forecasts possible to improve key performance indicators and make high quality decision-making.

 Treasury Level

An accurate cash forecast provides treasurers with a dependable and complete view of the evolution of the organization’s capital position and planning into the future. Moreover, treasury can plan and execute effective hedging operations to mitigate the risk. Efficient cash flow forecast process can both improve treasury efficiencies and reduce duplicative efforts from the global subsidiaries.

Credit and AR Manager level

Forecasting cash requirements and anticipated cash flow on a weekly, monthly, and yearly basis will give your business the tools to make better business decisions and head off problems before they arise. Having this detailed cash roadmap will allow you to manage debt effectively, plan for the use of excess cash, and as already stated, head off problems before they arise.