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.
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:
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:
These are addressed by:
Forecasting cash becomes arduous during volatility due to the reasons outlined below:
Due to the stated reasons, it is crucial to adjust forecasts regularly. This is where technology offers assistance.
Forecasting manually encounters shortcomings limited to short-term period with lower confidence due to the following factors:
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:
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:
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