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Do’s and Don’ts for Short Term and Long Term Cash Forecasting

What you’ll learn

  • Identify the do’s and don’t of short and long term cash forecasting.
  • Learn about the benefits and drawbacks of short and long term cash forecasting.

The treasury department performs cash forecasting on a regular basis in order to anticipate future cash flows, avoid crippling cash shortages, and maximize profits on any cash surpluses. Checklist for short and long term forecasting helps prepare a company to operate without financial constraints and provide a roadmap for achieving short and long term business goals.

Checklist for short term forecasting

A short term cash flow forecast is a method for estimating cash inflows and expenditures over a period of less than a year. A short term cash forecast is primarily used for short term liquidity planning and to track daily cash flows on a regular basis.

Purpose of short term forecasting

Short term forecasting serves the following purposes:

  • Evaluate many “what-if” scenarios and devise corporate strategies to avoid losses.
  • Avoid running out of funds during a volatile period.
  • To assist businesses in determining the most suitable finance for their needs, as well as borrowing in advance from banks and revolvers.
  • Optimizing short term lending/borrowing decisions.

Dos and don’ts for short term forecasting

Dos and Don'ts for Short Term Forecasting

Dos for short term forecasting

  • Determine the forecasting time frame: Before starting short term cash forecasting determine the time horizons (daily, weekly, or monthly) based on your company requirements.
  • Make a list of all expected cash receipts: For the time period, you have selected, include every source of cash and the amount you expect to receive, along with the expected date.
  • List all anticipated cash outlays: Make a list of all the items companies anticipate spending money on during a short time frame, as well as the expected day.
  • Monitor seasonality and trend: Track market seasonality and trends such as raw material price variations, interest rate changes, and commodity rate fluctuations for making proactive decisions.

Don’ts for short term forecasting

  • Missing out on incorporating customer payment patterns into the forecasts:Each customer has a unique payment pattern, which necessitates the use of customer-specific variables in order to obtain an accurate picture of future cash flow.
  • Forget to update and revise data for forecasts regularly: Sometimes it’s challenging to maintain regular forecasts using a spreadsheet. To overcome this, cash forecasting software is built to seamlessly integrate with ERP, TMS, accounting solutions, or other legacy systems via API or sFTP which help companies to achieve global and real-time visibility.
  • Neglect comparing forecasts to actuals frequently: The majority of businesses ignore variance analysis (comparing forecasts to actuals) or only do it for a short time or at the last minute. As a result, treasurers are more likely to make reactive rather than proactive judgments.
  • Overlook making adjustments based on different scenarios: Organizations tend to underestimate the occurrence and impact of negative events, making it difficult to recognize and plan accordingly for potential “worst” case scenarios. Best practices are always adding what-if scenarios to the forecasts for preventing negative impacts on cash flows.

Checklist for long term forecasting

Long term cash forecasts are mainly generated for a period of two to five years and help to provide a rough picture of a company’s future financing needs and investable surplus. Long term cash forecasts assist in the planning of capital projects as well as the raising of long term financing.

Purpose of long term forecasting

The following are the purposes for long term cash forecasting:

  • Evaluate the quality, update, or replacement dates of assets in order to save money on new purchases and to identify buyers for deteriorating assets.
  • Align towards the FP&A goals.
  • Reduce borrowing expenses in order to quantify profits.
  • Eliminate the need to maintain a higher cash buffer to save interest costs.

Dos and don’ts for long term forecasting

Dos and Don'ts for Long Term Forecasting

Dos for long term forecasting

  • Rolling out the beginning balance: Rolling out the beginning balance increases levels of cash and enhances the cash management process for a long time.
  • Understand sources and uses of cash: Understand the long term sources of your account receivables and make investment/borrowing decisions accordingly.
  • Use appropriate detailed historical data:Understand the data framework to gather, analyze, cleanse master data to build accurate long term forecasts.
  • Spot the variances: Best practices for long term forecast to do variances analysis for multiple duration to spot, report and fix the reasons for the variations.

Don’ts for long term forecasting

  • Miss out on tracking late payments: Split the A/R  into various subcategories such as regions, customers, companies. Drill down into the historic data to analyze customer payment terms and credit scores. This will help in detecting bottom-line concerns and slow-paying customers.
  • Using spreadsheets as data inventory:Data crunching and aggregation from multiple spreadsheets into a single master sheet while doing long term forecasts is time-consuming, error-prone, and reduces visibility.
  • Stick to outdated technologies: Sometimes companies are unable to centrally consolidate cash forecasts due to outdated systems, which leads to poor visibility. Additionally, it creates barriers for better cash repatriation, pooling, and hedging.
  • Miss out of tracking variances:  Companies are sometimes unable to track long term forecast variances. So, they are lagging in making adjustments and mitigating risks by identifying the source of error.

How to improve long term and short term cash forecasting 

Cash forecasting process is challenging, and forecasting cash transactions is the most difficult single challenge. A detailed, bottom-up statistical approach yields the most accurate forecasts. Long term and short term cash flow forecasts have traditionally been created in spreadsheets. However, dealing with such massive amounts of data in a spreadsheet can be tedious and often time-consuming. By using HighRadius’ cash forecasting software, users can eliminate the stress of creating short and long term cash forecasting, save time, and get an accurate, up-to-date snapshot of the business’s state.

Here are some benefits of using cash forecasting software for both short and long term forecasting:

  • Achieve high accuracy in both short and long term forecasting.
  • Save time for value-added activities.
  • Drill down forecast which helps to spot, report and fix the reasons for the variations which reduce the variance of the forecast.
  • Simplify risk management with AI-based scenario planning, which involves making tiny adjustments to data in a spreadsheet.

Talk with our solution expert today, to get 95%+ accuracy in both short term and long term forecasts.

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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.