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How cash flow forecast software can help companies scale growth initiatives

What you’ll learn

  • Learn how cash forecasting helps scale growth initiatives in companies.
  • Understand the skills and areas of focus for successful cash and risk management during M&As.

How can cash flow forecasting help companies scale growth initiatives?

One of the most important skills for business executives is managing cash flow effectively when running a company to ensure growth. Cash flow forecasting is valuable in managing resources, improving business performance and returns, and scaling growth initiatives. 

However, developing a cash forecast is challenging because it entails measuring, tracking, and making accurate assumptions about the organization’s growth.

Forecasting cash flow is cumbersome: Is it worth it?

Bottlenecks in forecasting cash flows

There are a few factors that cause unpredictability and inaccuracy in forecasting cash flows, such as:

  • Data for forecasting is gathered from numerous teams throughout an organization who are in charge of distinct cash flows. This can lead to delays and errors. Hence, the quality of the data and cash forecasting declines. 
  • Spreadsheets cannot account for seasonality when making market opportunity estimates, which results in missed or delayed long-term investment and M&A possibilities. Additionally, due to erratic economic downturns, there is a persistent lack of confidence in long-term forecasts.
  • Data analysis demands financial knowledge. The forecasting effort may have produced reliable results, but it won’t be very useful if management cannot translate them into actionable insights.
  • Indirect top-down forecasting isn’t accurate as local forecasts are created at the entity level by gathering data from internal teams. Making strategic decisions becomes challenging without continuous data visibility or drill-down capability. High turnaround time for creating consolidated central treasury forecasts delays reporting and decision making.

Why is forecasting important for any business model?

With cash forecasting, businesses can measure how much money is going out to fuel their growth and manage their assets. For cash-deficit companies, cash forecasting helps secure loans at low-interest rates, whereas for cash-rich companies, it helps in business growth.

Four skills for effective cash flow forecasting for treasury executives

  1. Know your organization:
  2. When it comes to forecasting, there is no one-size-fits-all method. Thus it is crucial to customize the method chosen following the demands and goals of the firm. The objective may be to ensure enough cash on hand to pay obligations, lower external funding, maximize liquidity, or get visibility into covenant levels for expansion or M&A. 

  3. Tap into the right data sources:
  4. For efficient cash flow forecasting, solid technical knowledge is a requirement. The projection must be based on precise and timely data from bank statements, the company Resource Planning (ERP) system, or the Treasury Management System, and input from the pertinent business units. It is essential to gather the required data from relevant systems.

  5. Manage data effectively:
  6. The treasury team can dig deeper into the data to fine-tune the forecast if they have excellent data management abilities. Historical data is critical to contextualize that data and screen out abnormalities. For instance, a significant acquisition might not accurately reflect typical flows, but other deviations might be less obvious. 

  7. Communicate effectively:
  8. Effective communication is one of the cornerstones of good cash flow forecasting. A forecast needs input from a range of people within the company who can offer significant data and insightful observations that will deepen understanding of the factors that influence the statistics.

During M&As, cash inflows and outflows not included on the income statement are reflected in asset and obligation balance changes. It is important to focus on the cash flow during these phases and use cash flow forecasting software to ensure proper visibility. Some of the other critical areas to focus on are listed below. 

Four critical drivers for successful cash and risk management during M&A

When looking to scale growth initiatives, treasurers should consider the following drivers:

What are the critical success factors for mergers and acquisitions? 

  1. Timeliness: Near-real-time forecasting to support prompt business choices. One can attain timeliness by:
    • Collecting the best info that is available constantly.
    • Updated predictions periodically show current information for better business decisions.
  2. Scalability: Standardize procedures to make it simple to transfer them to other entities. Scalability is attainable by:
    • Adding flexibility to the procedure will prevent it from breaking when a new system or bank is added.
    • Making it simple to reproduce or stop the process when a new firm is bought or sold.
    • Ensuring that resources may concentrate on value-added tasks once the system is operational.
  3. Granularity: Facilitating course correction and enhancing the capacity to delve deeply into invoice-level data. Granularity can be achieved by choosing centralized forecasting over decentralized forecasting. Centralized or direct-method of forecasting is a bottom-up approach where local forecasts are rolled up to the central treasury. It supports granular analysis with better visibility of cash flows. Centralized forecasting has the following impacts:
    • Better decision-making in terms of borrowing and investing.
    • Continuous data visibility across all systems to improve strategic financing decisions.
    • Better understanding of how transaction-level activities influence global forecasts.
    • Drill-down capability to specific customer accounts or transactions to determine potential variance sources.
  4. Accuracy: Achieve the baseline accuracy necessary for the company to make decisions confidently. The following techniques can be used to increase forecasting accuracy:
    • Using new treasury technologies: Making use of technologies like robotic process automation (RPA), machine learning (ML), and artificial intelligence (AI).
    • Using the suitable models for each cash flow category: AI for complicated operational cash flow categories like A/R and A/P. Heuristic models for more stable and predictable categories like payroll, taxes, and CAPEX.
    • Carrying out variance analysis for various time periods: It helps in the following ways:
      • finding problems with the projections
      • increasing the forecasts’ accuracy

How can AI-enabled cashflow forecasting software help scale growth initiatives?

What are the advantages of a cash flow forecast software?

By using cash flow forecast software, treasury leaders can do the following:

  • Distribute cash surplus efficiently: Execs can spot future surpluses and allocate surplus income effectively. They can employ projections and put extra income to use to gain a competitive edge or to improve cash flow forecasting.
  • Understand the “what if” scenarios: Business leaders can perform scenario planning for estimating changes in cash flow in response to changes in occurrences that may affect organizational cash flows. They can forecast and avoid financial shortages by thorough scenario planning or using their excess cash for investments or business growth.
  • Manage FX risk: Cash flow forecasts help treasury leaders determine their company’s foreign exchange exposure. Hence, they can prepare well for FX fluctuations and soon reduce FX risks.

HighRadius’ AI-enabled cash flow forecasting software helps optimize financial decisions by providing:

  • Connectivity with multiple data sources
  • Tailored forecast models
  • Category, currency, and company-level forecasts
  • Scenario analysis
  • Variance analysis

Schedule a demo to learn more about how HighRadius can help your company deal with market volatility and scale growth initiatives.

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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.