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Best practices in cash forecasting to adopt for a data-driven treasury

What you’ll learn

  • Learn the importance of accurate cash forecasting
  • Understand the best practices for a data-driven treasury
  • Learn the benefits of digital transformation in treasury

Cash flow forecasting: A key to business’ survival

Cash flow forecast definition

A projection of an organization’s future financial condition based on projected inflows and outflows is known as a cash flow forecast. By using cash forecasting, a company may make sure it has enough money to pay its debts. Forecasts are crucial for growth since they direct strategic financial and investment decisions, influencing the company’s future and enhancing the bottom line.

Why do businesses forecast cash flow?

Forecasts are crucial for growth because they impact strategic financial and investment decisions that alter the company’s future and increase profits. Cash flow forecasting enables businesses to operate without financial constraints and offers a roadmap toward achieving short-term and long-term company goals. Cash flow forecasts give companies the foresight to take corrective action, such as fine-tuning strategies, refunding assets, or approaching lenders. It saves the treasury teams time and effort while improving output quality. Cash flow forecast is essential for businesses for the following reasons:

  • Managing surplus cash
  • Optimizing the working capital
  • Lowering risk by hedging
  • Forecasting payables and receivables
  • Making better borrowing, funding, and investment decisions

Why are accurate cash flow forecasts important?

Accurate cash flow forecasting provides real-time data and insights for CFOs to make better decisions. This enhances their credibility with the external stakeholders. Accurate cash flow forecasting allows businesses to foresee significant cash gaps and avoid missed payments. An accurate cash flow forecasting gives treasurers a detailed and valid view of the evolution of the company’s capital situation and future planning.

What are the best practices for a data-driven treasury?

The following are the five best practices that lead to a data-driven treasury:

  1. Determine the goal of cash forecasting and begin with a base rate
  2. Adopt automation for data aggregation and cash forecasting
  3. Visualize future cash flows by incorporating a variety of scenarios into the cash forecasts
  4. Analyze the variance between forecasts and actuals frequently
  5. Inculcate the practice of re-forecasting and updating your cash forecasts regularly

How does cash flow forecast software lead to data-driven treasury?

According to Corporate Bank’s report, treasurers say the primary benefits of becoming more data-driven are higher operational efficiency (39%) and improved return on investments/assets (36%). 

Treasury cash flow forecasting software increases forecast accuracy by comparing old and new forecasts, identifying discrepencies, and making continuous refinements. The accuracy of cash flow forecasts and real-time data visibility help treasurers proactively detect and mitigate risks before they cause losses for the company. AI-powered cloud-based solutions save time and money while easily integrating with several data sources such as Treasury Management Systems, accounting tools, banks, spreadsheets. Cash flow forecast software also ensures that data is user-based, accessible, and seamlessly integrated.

It enables treasurers to secure deeper insights and even improve data quality and provides these additional benefits:

  • Processing data, making accurate forecasts, and spotting trends or irregularities in consumer and transaction behavior.
  • Obtaining customer data for effective due date monitoring and a better understanding of payment patterns.
  • Identifying differences between forecasts and reality and monitoring different scenarios
  • Prioritizing recent trends above the old ones for factoring changes in stock prices, bank deposits, and withdrawals
  • Continuous data access for managing counterparty and foreign exchange risks

Impact of data-driven cash flow forecasts

Here are a few impacts of data-driven forecasting on the treasury:

cash flow forecasts

  • Reduced forecasting turnaround time: 

    Cash flow forecast software produces timely, high-quality reports with insightful details and drill-down capabilities. Since the turnaround time is reduced, the CFOs can instantly gather reports on cash flows, available balances in banks, and funding requirements. The reports are also accurate enough to be shared with external stakeholders and build credibility with the board and investors.

  • Effective cash management:

    For companies with an extensive product portfolio and high volume of customers, managing cash will be effective using a centralized environment. This approach ensures lower costs and strong data integrity. Cash forecasting software seamlessly integrates with ERPs, bank portals, FP&A systems, and legacy systems and through API or sFTP and dashboards help to gain easy and continuous data access. This leads to high cash visibility and better cash management.

  • Reduced idle cash:

    Continuously managing cash inflows and outflows helps identify the areas and the time when there is a possibility of cash surplus. This helps to plan by collaborating with various teams and avoiding reactive decisions that lead to overborrowing, penalties, or non-optimal business investment. Cash forecasting software helps to track surplus/idle cash for treasurers to utilize idle cash for growth-related purposes or investments.

  • Increased savings:

    Cost savings increase because accurate cash flow forecasting helps firms prevent overborrowing. Automation helps in generating time savings to reallocate tasks of treasury to high-value tasks such as driving informed decisions across daily treasury operations. Automated cash flow forecasts also increase visibility into daily cash positions. Thus treasurers can better overview collection strategies, liquidating assets, or borrowing in advance at lower interest rates. 

Customer success story

A $600 million global industry leader faced these challenges:

  • Indirect forecasting method with low accuracy
  • Time consuming complex process
  • Inefficient data gathering process

By using the HighRadius cash flow forecasting software, it achieved the following results:

  • Direct method used for forecasting providing data drill down
  • Increased global visibility for better cash management during uncertainty
  • Multiple forecast horizons from 1-Day to 6- Months are updated daily
  • More variables are used as input for forecasting, improving accuracy
  • Variance analysis provided root-cause of fluctuations
  • Automated data gathering process saving time and effort

There’s no time like the present

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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.