4 Ways Direct Cash Flow Forecasting Prepares You For Volatility

Difference between direct and indirect cash forecasting

What are the advantages of using direct cash forecasting?

Direct cash forecasting allows for more granular analysis and insight, allowing companies to:

• Avoid running out of funds during a volatile period.
• Stay debt-free by collecting past-due payments from slow-paying customers as soon as possible.
• Work closely with banks to ensure that current balances are accurate and that credit revolvers are used properly.

Direct cash flow forecasting prepares companies for economic volatility in the following ways:

What is meant by granular visibility

Granular visibility is the ability to drill down to the various cash flow categories across currencies, company codes, and regions.

Key steps for tracking cash movement frequently

For tracking cash movement frequently:

• Use bottom-up forecasting/direct cash forecasting to gain high visibility.
• Track customer payment patterns.
• Use specialized models for various cash flow categories (AI models for A/R and A/P forecasting and heuristic models for taxes and payroll forecasting).
• Use AI-based cash forecasting software for increasing the accuracy of forecasts.
• Perform variance analysis at the entity, region, and cash flow category levels for multiple durations.

Benefits of having high cash flow visibility in treasury

High visibility into cash inflows and outflows help treasurers to:

• Make informed decisions financially with real-time visibility into liquidity.
• Plan outcomes of different scenarios with accurate cash flow forecasting.
• Control and manage risks proactively.
• Provide insights to make better funding and investment decisions.
• Reduce dependence on external funding/borrowing.

Challenges of tracking customer payment patterns

Each customer has a unique payment pattern, and different invoices have different dollar values. Therefore all payments are not made at a certain time. Moreover, it is challenging to track various customer payment patterns manually.

Tips to track customer payments patterns

• Increase cash visibility: Use APIs and RPA to capture the data spread across multiple entities such as TMS’, ERPs, bank portals, and sales order systems in a single repository.

• Capture historical data: Analyze consumer payment terms and credit scores by analyzing customers’ historical data. Use this data to identify high-risk customers.

• Track late payments: Late payment affects businesses by causing debt, penalties, and business shutdown. So it’s crucial to keep a track of late payments and take preventive measures.

• Incorporate multiple customer-specific variables in cash forecasts: Adding customer-specific variables gives a more realistic view of payment patterns.

Understanding different customer payment patterns improve the working capital of a business by ensuring prompt payments from customers.

Treasury departments majorly focus on making decisions for:

• Borrowing
• Investing
• Payments strategy execution
• Working capital management
• Capital planning
• Risk management

COVID-19 has revealed unforeseen risks and that has exacerbated the need for faster decisions. Treasury teams are now focused on making timely and confident business decisions on managing working capital through accurate cash flow forecasting.

The strategic role of treasury

The pandemic has given treasury professionals and the treasury department an opportunity for:

• Becoming more connected within and across finance.
• Making cash a business agenda rather than a finance agenda.
• Enabling stakeholders to make better decisions with accurate reporting.

How can treasurers make confident decisions?

Using scenario analysis

During turbulent times, scenario analysis:

• Helps businesses capture different ‘what-if’ scenarios and plan business strategies to prevent losses.
• Helps companies see the effects of their decisions and make improvements.
• Allows treasurers to understand the potential impact of specific variables by identifying potential risks.
• Helps in making strategic action plans that prevent macroeconomic risks.
• Helps identify possibilities for revenue growth while optimizing customer and supplier relations.

Using direct cash flow forecasting

Direct cash forecasting helps treasury in the following ways:

Benefits of confident decision-making

• Prevent falling short on cash during volatile times.
• Work jointly with banks to monitor current balance and make decent use of credit revolvers.
• Stay debt-free by collecting due payments faster from slow-paying customers.

How direct cash flow forecasting helps monitor cash requirements

Businesses often spend a lot of time forecasting at both corporate and business levels. But most of the time is spent on low-value activities like data gathering and consolidation in spreadsheets rather than high-value activities like drawing useful insights from the data and making strategic decisions. Automation helps CFOs get accurate insights into the cash requirements and make better financial decisions.

How automation helps in analyzing cash requirements

Using automation for cash flow forecasting can:

• Save up to 90% of the manual effort needed to construct and interpret a forecast using a spreadsheet.
• Help extract data directly from the sources such as ERP, TMS, and bank portals.
• Track real-time data quickly due to a single depository of data and continuous data updations.

How does gaining more visibility into cash requirements help treasury

Borrowing effectively and proactively

The following are some of the advantages of gaining more visibility into cash requirements for successful borrowing:

• Assists businesses in selecting the most appropriate financing for companies’ requirements and borrowing in advance from banks and revolvers.
• Saves businesses money in the long run by reducing interest rates and avoiding penalties for late payments or mismatched products using current debts management.

Hedging FX proactively 

Pulling funds out of a foreign company unit at the wrong moment can be a costly mistake for organizations. So, when the foreign exchange (FX) market is particularly volatile (due to black-swan events such as recession, inflation, Covid-19), corporations need to hedge more cautiously to guarantee they are protected from financial risks. Having better cash flow visibility allows companies to take advantage of a favorable exchange rate or a successful investment that they may otherwise miss if they hedge conservatively.

Getting the most out of business loans

Once the loan has been secured, cash flow forecasting can help the company make the most of it by factoring in information about loan repayments and the interest and fees that must be paid. A forecast can indicate how much money the company will have once the loan has been funded. Here are some instances:

• A cash flow forecast showcases to a bank or lender that the company is worthwhile to invest in.
• A company can design a plan for how much money to put toward loan repayment with adequate cash visibility.
• An organization may plan for its payments and determine when to pay other obligations to keep cash flowing efficiently.

Direct forecasting allows companies to obtain more detailed information at a granular level for drawing insights, especially during volatility, by leveraging technologies such as AI to improve cash forecasting and decision-making.