Business leaders cannot use a crystal ball to predict a probable economic collapse. However, due to market turbulence and the potential for financial instability, it is advised that the key to minimizing threats in a recession is to be proactive rather than reactive during an economic downturn. Regardless of market fluctuations, a company's cash management strategy should provide opportunities for growth. This blog discusses how an accurate cash flow forecast can help CFOs with strategic planning in order to recession-proof their business, achieve short-term goals, and move closer to long-term goals.
The CFO, Treasurer, and Board of Directors require forecasts on a monthly/quarterly basis but they seldom require frequent iterations. Furthermore, since working capital isn’t a top concern, a reasonable accuracy is acceptable. The treasury team collects data manually from various data sources, consolidates them into a single spreadsheet, and updates the forecasts on a periodic basis.
CFOs expect a higher degree of accuracy at regular intervals, as well as make more frequent adjustments to recent cash flow data. During a recession, with working capital being a major concern, the Treasury Department has to re-forecast on a regular basis, but gathering data and collaborating with teams gets tedious.
During high economic volatility, measuring the Cash Conversion Cycle becomes necessary to make working capital decisions. This is how it is calculated:
CCC=DIO+DSO-DPO
A shorter Cash Conversion Cycle indicates better working capital management and the financial health of the company.
The lower the DSO, the lower is the CCC. Since DSO is impacted majorly by AR, AR forecasting helps in detecting early indicators of cash shortfall such as:
These are addressed by:
Forecasting cash becomes arduous during volatility due to the reasons outlined below:
Due to the stated reasons, it is crucial to adjust forecasts regularly. This is where technology offers assistance.
Forecasting manually encounters shortcomings limited to short-term period with lower confidence due to the following factors:
The limitations of manually-driven forecasting can be eliminated by leveraging tools. These are some of the benefits that technology brings to achieve better cash forecasting accuracy:
An accurate cash flow forecast aids CFOs in strategic planning to improve results, achieve short-term objectives, and move closer to long-term objectives.
The additional advantages include:
HighRadius Integrated Receivables Software Platform is the world's only end-to-end accounts receivable software platform to lower DSO and bad-debt, automate cash posting, speed-up collections, and dispute resolution, and improve team productivity. It leverages RivanaTM Artificial Intelligence for Accounts Receivable to convert receivables faster and more effectively by using machine learning for accurate decision making across both credit and receivable processes and also enables suppliers to digitally connect with buyers via the radiusOneTM network, closing the loop from the supplier accounts receivable process to the buyer accounts payable process. Integrated Receivables have been divided into 6 distinct applications: Credit Software, EIPP Software, Cash Application Software, Deductions Software, Collections Software, and ERP Payment Gateway - covering the entire gamut of credit-to-cash.