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.
There are a few factors that cause unpredictability and inaccuracy in forecasting cash flows, such as:
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.
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.
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.
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.
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.
When looking to scale growth initiatives, treasurers should consider the following drivers:
By using cash flow forecast software, treasury leaders can do the following:
HighRadius’ AI-enabled cash flow forecasting software helps optimize financial decisions by providing:
Schedule a demo to learn more about how HighRadius can help your company deal with market volatility and scale growth initiatives.
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.