Cash flow forecasting, an important aspect of financial management.
Read our blog and learn more about the common mistakes of cash flow forecasting.
A cash flow forecast is a projection of an organization’s future financial position based on anticipated inflows and outflows. Cash forecasting helps to ensure that the business has enough cash to meet its obligations. Forecasts are also essential for growth, as they guide strategic financial and investment decisions, shaping the future of the company and boosting the bottom line.
Cash forecasts allow organizations to better understand their cash flows and prepare for potential problem areas. With forecasting cash, you can
Forecasts help in understanding operational and investment cash flows, thus enabling sufficient time to plan for financing requirements and avoiding unfavorable terms or penalties.
Working capital is efficiently managed through cash flow forecasting, by understanding the cash conversion cycle and the overall trends in current assets and current liabilities.
Operational cash flows like A/R and A/P are hard to forecast due to numerous areas that drive variability, such as customer payment behavior, credit quality score, different payment methods, rebates, time of purchase and delivery of goods, etc. Including these variables in the forecast will help you stay prepared for future events.
Understanding the potential cash effects of changes in interest rates, foreign exchange, or commodity price volatility can inform various risk mitigation strategies, including hedging.
Accurate forecasts enable investments, and funding can be done smoothly to ensure short-term and long-term objectives.
Projecting cash flows is difficult because of the following reasons:
Cash is the lifeblood of a business. Thus it is essential to monitor it with cash flow forecasting. Following are some tips to improve your cash flow forecasts:
Cash flow forecasts are affected by various factors like economic volatility and limited historic data that contribute to increasing the variance in forecast and hindering decision making. Prediction always comes with a high probability of uncertainty, so many firms lacking accurate forecasting processes express low confidence in their forecasts, especially long-term forecasts.
The mistakes while evaluating cash flow forecasts are:
Cash flow is difficult to track mainly because Accounts Receivable and Accounts Payable are unpredictable, making it difficult to forecast.
The factors that make A/R difficult to project are:
The factors above add to the unpredictable nature of A/R. The issues while forecasting arises due to the following reasons:
A/P is inaccurate in the long-term due to the following factors:
The unpredictability of the above factors leads to inaccuracy in the forecast. The challenges to forecast A/P are:
Thus, it is important to rely on automation that allows having a high-level view across various regions and cash flow categories; and consider Artificial Intelligence to predict A/R and A/P accurately, and generate forecasts efficiently and confidently.
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.