Recession Proofing Your Business: Cash Forecasting During Volatility

What you’ll learn


  • In the wake of a pandemic, multiple industries such as manufacturing, hospitality, service providers have been exposed to a shortfall of cash due to lack of demand, disruption in the supply chain, and inability to forecast cash accurately. According to PwC’s COVID-19 CFO Pulse Survey, 71% of treasurers stated liquidity as a top concern during the crisis.

Cash forecasting during normalcy vs. crisis

Cash forecasting during normalcy

The CFO, Treasurer, and Board of Directors require forecasts on a monthly/quarterly basis but they seldom require frequent iterations. Furthermore, since working capital isn’t a top concern, a reasonable accuracy is acceptable. The treasury team collects data manually from various data sources, consolidates them into a single spreadsheet, and updates the forecasts on a periodic basis.

Cash forecasting during a crisis

CFOs expect a  higher degree of accuracy at regular intervals, as well as make more frequent adjustments on recent cash flow data. During a crisis, with working capital being a major concern, the Treasury Department has to reforecast on a regular basis, but gathering data and collaborating with teams gets tedious.

During high economic volatility, measuring the Cash Conversion Cycle becomes necessary to make working capital decisions. This is how it is calculated:

CCC=DIO+DSO-DPO

A shorter Cash Conversion Cycle indicates better working capital management and the financial health of the company.

Lower the DSO, lower is the CCC. Since DSO is impacted majorly by A/R, A/R forecasting helps in detecting early indicators of cash shortfall such as:

  • DSO lengthening
  • Lower customer credit score
  • Partial payments
  • Payment terms pushback

These are addressed by:

  • Aggressive collections
  • Leveraging supply chain finance to mitigate risks
  • Providing incentives to fast-paying customers
  • Getting creative with payment terms to identify long-term customers

Challenges in cash forecasting during a crisis

Forecasting cash becomes arduous during volatility due to the reasons outlined below:

  • Lack of baseline historical data or inaccurate data.
  • Different industries affected differently by economic distress.
  • Key cash flow indicators change on a regular basis, making forecasting assumptions obsolete over time.

Due to the stated reasons, it is crucial to adjust forecasts regularly. This is where technology offers assistance.

Cash forecasting limitations of manual processes

Forecasting manually encounters shortcomings limited to short-term period with lower confidence due to the following factors:

  • WFH makes cross-collaboration between teams difficult which negatively impacts data gathering.
  • Excel limits appropriate models that can meet business requirements.
  • Historical data is insufficient in rapidly changing environments.

Technology’s Contribution for Continuous and Accurate Cash Forecasting

The limitations of manually-driven forecasting can be eliminated by leveraging tools. These are some of the benefits that technology brings to achieve better cash forecasting accuracy:

  • Easy aggregation across data sources automatically and single repository that makes it easier to access data.
  • Bottom-up forecasts and flexible models provide better ways to tailor forecasts based on industry needs.
  • Time series forecasting allows integration of recent trends and makes it simple for reforecasting.
  • Real-time reports boost confidence among the upper management.
  • The aging of A/R is predicted more practically with AI by using more variables and algorithms.
  • Forecasting is done more frequently for various cash flow categories with continuous variance analysis between forecasts vs. actuals

Impact of Accurate Cash Forecasting for Liquidity Planning

An accurate cash flow forecast aids CFOs in strategic planning to improve results, achieve short-term objectives, and move closer to long-term objectives.

The additional advantages include:

  • An optimized cash conversion cycle.
  • Better scenario planning to take proactive steps to combat future cash flow issues.
  • Superior decision-making towards investments and borrowing over longer time horizons at low-interest rates.
  • Accurate estimation of quarter-ending cash position by keeping the balance sheet up to date.
  • Possibility to run what-if scenarios for both short-term and long-term liquidity planning.
  • Lower variance between forecasts vs. actuals.
To learn more about the importance of AI-based cash flow forecasting,watch this webinar
Click for full HighRadius webinar on recession proofing your business, cash forecasting during volatility

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HighRadius Cash Forecasting Cloud – an advanced forecasting system – leverages the proven RivanaTM Artificial Intelligence (AI) platform to provide the most accurate cash flow forecasts – right from a ledger account level and rolling up to the organizational level. Delivered as a Software as a Service (SaaS), the solution seamlessly integrates with your company’s ERPs, accounting systems, banks and order management systems. Multiple AI and Machine Learning algorithms process datasets including bank statement inflows/outflows, sales orders/customers invoices, purchase orders/vendor invoices and expense reimbursements for comprehensive as well as accurate cash flow forecasts. The closed-loop, machine learning feedback system ensures that the forecast models become more accurate with time.