Automated cash forecasting in times of crisis

How cash forecasting automation arms treasurers during times of crisis

When a crisis strikes, companies take a hit financially. To prevent catastrophic effects on liquidity, accurate cash forecasting is essential.

Cash forecasting automation provides the following benefits such as:

• Granular visibility: Companies with worldwide operations require a consolidated view of their cash flows at regional levels. Automation provides a centralized view of cash flows across categories, regions, and currencies to ensure proactive crisis management.

• Accuracy: An automated cash flow forecasting software generates accurate forecasts by incorporating trends, patterns, and seasonality that may not be fully identifiable by human analysis. This allows complex categories, such as A/R and A/P, to be forecasted more accurately. With automation, the variance between forecasts and actuals can be identified for multiple categories and horizons.

• Automated reporting: Data can be gathered automatically from multiple financial sources such as ERPs, banks, TMS, and FP&A systems. This ensures that the data is up-to-date, which in turn helps CFOs make confident decisions on borrowing, investments, M&A, and repatriation.

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What is the treasury team’s involvement during times of crisis?

Since the treasury is responsible for handling all the cash flows of a business, teams need to respond immediately and proactively to avert an economic crisis.

The focus points for treasurers amid a crisis are as follows:

• Optimizing the cash conversion cycle by forecasting A/R with high accuracy and frequency. This aids them in predicting payment dates accurately by tracking customer-specific payment behaviors.

• Stress-testing different scenarios for the short-term and long-term, and mounting corrective measures to minimize the impact of those scenarios.

• Performing long-term forecasts to make confident decisions on investments, business growth, and mergers and acquisitions.

• Performing accurate and up-to-date forecasts through continuous variance analysis to minimize the need to maintain high cash buffers and borrowing at high-interest rates.

With an automated forecasting solution, treasurers can easily access data and shift their focus to the activities mentioned above instead of performing low-value tasks.

What exactly is a potential business crisis, and what risks does it present to cash flow?

According to PwC’s Global Crisis Survey 2021, finance and liquidity are among the top 3 impacted areas during an economic crisis. A ‘black swan event’ such as Covid-19 had already proved that treasurers need to be alert with crisis management and business continuity plans. Crises such as a pandemic, recession, and macroeconomic fluctuations can impact business cash flows without prior warning.

The major challenges that companies face during crises are:

• Increased cash buffers
• Idle cash
• Fall in asset prices
• Poor receivables management and collections
• Data thefts
• Borrowing at higher rates
• Penalties due to bad debts
• Bankruptcy

As the crisis unfolds, business leaders should not resort to using their intuition alone for making critical decisions. Treasury can better cope with uncertainty by continually monitoring their cash position, forecasting their future liquidity state, and also mapping and measuring their responses.

How can your treasury team be prepared to respond to crises?

The following are ways treasury teams can respond to a crisis with an automated cash forecasting solution:

1. Use the baseline forecast as a reference

Treasurers can regularly track current and future cash positions based on the forecasts. A baseline forecast is critical to analyze and make tweaks to the forecast models. This leads to proactive cash management.

2. Incorporate internal and external data into forecasts

Determining the right data sources helps ensure accurate data for fetching reliable cash forecasts. Considering historical performances and incorporating seasonality trends and external factors such as raw material price fluctuations and customer patterns helps improve forecast accuracy.

3. Detect early signs of cash crunch

Accurate data and real-time reporting are useful to identify potential cash crunches or spikes so that treasurers don’t just stick to making short-sighted decisions. Through accurate cash flow forecasts, CFOs can be in a better position to devise effective decisions to mitigate the impacts of potential financial threats.

Speak to a solutions expert to learn more about how automated cash forecasting helps treasury teams prevent detrimental effects during times of crisis.