Cash forecasting has been the topmost priority for treasury for managing liquidity by implementing quicker and better decisions.
There are two types of cash forecasting:
1. Short-term cash flow forecasting: It ranges from periods of 4 weeks to 6 months. It requires high accuracy and frequency. Short-term forecasting is useful to identify potential cash crunches and surpluses.
2. Long-term cash flow forecasting: It ranges from periods of 6 months to 5 years. It allows some leeway for accuracy and frequency and is useful to guide FP&A decisions.
The questionable period ranges from 6 months to 12 months, where both forecasts are applicable. So companies analyze their data and purposes to make a choice between both.
There are 4 stages to segregate firms based on their cash forecasting practices.
There are 4 stages in the cash forecasting maturity model:
Most companies want to improve their processes, but they don’t know how to significantly climb up the ladder to become best-in-class.
The 4 pillars of the cash flow forecasting process are:
1. Approach: The approach is either artistic or scientific(subjective or objective).
2. Data gathering: Data is extracted from a variety of sources and teams.
3. Modeling: Various models can be used for forecasting different cash flow categories.
4. Variance analysis: It is performed by using appropriate tools to measure accuracy across various areas and time horizons.
The way to become best-in-class is to refine the 4 pillars of cash forecasting through the following ways:
Approach: Build bottom-up forecasts by rolling up local forecasts to global forecasts.
Data gathering: Use API to extract historical and current data seamlessly.
Modeling: Use heuristic models and AI models for suitable cash flow categories.
Variance analysis: Analyze variances over multiple time horizons and entities.
Take this quiz to evaluate the stage of your company (Laggards, Proactive, Strategic, Best-in-class) in the cash forecasting maturity model.
Dive deeper into the 4 pillars of cash forecasts and how to optimize the current processes.
The HighRadius™ Treasury Management Applications consist of AI-powered Cash Forecasting Cloud and Cash Management Cloud designed to support treasury teams from companies of all sizes and industries. Delivered as SaaS, our solutions seamlessly integrate with multiple systems including ERPs, TMS, accounting systems, and banks using sFTP or API. They help treasuries around the world achieve end-to-end automation in their forecasting and cash management processes to deliver accurate and insightful results with lesser manual effort.