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Incorporating Scenario Modeling Approach for Better Cash Forecasting

What you’ll learn


  • Discover the significance of scenario modeling in cash forecasting
  • Learn how to avoid running out of funds during a volatile period by incorporating scenario modeling

Cash forecasting in the age of uncertainty

The pandemic had an immediate and extremely unpredictable impact on cash flow, both in cash surplus and cash deficit industries. As the availability of materials decreases and costs rise, supply chains are being severely impacted. Suppliers demand payment in advance, but customers tend to delay payments, putting a strain on working capital. During the current economic distress, a company’s priority shifts from raising sales and profits to preserving capital and liquidity. According to MorganFranklin’s survey in 2020, more than 60% of organizations are concerned about their liquidity and cash management.

MoranganFranklin's survey

What is the role of scenario modeling in cash forecasting

What is scenario modeling

Scenario modeling is a method for estimating changes in numbers, such as those in the cash flow or balance sheet, in response to changes in occurrences, both positive and negative, that may affect organizational cash flows.

Why scenario modeling is important

It helps capture the ‘what-if’ scenarios and gives a company the ability to predict how different variables will affect its business goals and plan accordingly.

What-if scenarios can be monitored and handled through stress testing. Stress testing is a type of scenario analysis that focuses on worst-case scenarios. It is frequently used in conjunction with a computer simulation technique to assess the resilience of institutions and investment portfolios in the face of potential future critical situations. It is commonly used in the financial industry to assess investment risk and asset adequacy.

With proper scenario planning, companies can predict and prevent cash shortages or use their surplus cash for investments or business expansion.

Here are some best practices for improving scenario modeling in cash forecasting:

  • Choose the appropriate modeling technique for the business: In scenario modeling, at least three to four scenarios should be modeled to sufficiently cover the range of possible outcomes. which has a direct impact on the bottom line, should be modeled to sufficiently cover the range of possible outcomes. For instance,
    • Raw material price fluctuations
    • Customer metrics such as late/early payments
    • Operating costs
    • Change in interest or commodity rates
    • Mergers and acquisitions
    • Intercompany transfer

    Additionally, develop alternatives that can be used in worst-case scenarios like cash crunch, inflation, pandemic, etc.

  • Manage complexity: The complexity of scenario models should be kept to a minimum. Companies should aim to identify a few important factors that describe both the external macroeconomic environment, such as GDP growth by sector, and company-specific parameters, such as fixed operating costs. Only the financial line items essential for decision-making should be simulated to reduce redundancy.

Benefits of incorporating scenario modeling through AI-based cash forecasting

Prevent losses

To mitigate potential losses, concentrate on both short and long-term forecasting. Better outcomes can be obtained by selecting correlated factors and determining the most appropriate forecasting model which minimizes or reduces possible losses due to uncontrollable causes by being proactive in analyzing and avoiding worst-case scenarios.

Improve investments or rate of returns

Examine investment chances using scenario modeling in cash forecasting. The modeling uses tools to compute the values or numbers of potential investment gains or losses. This provides investors with tangible, measurable information to improve decision-making for investments.

Recognize and prepare for cash shortages

Increase confidence in making decisions and reporting. Accurate forecasts can help predict and lessen the impact of a cash deficit situation through proactive borrowing.

Allocate financial surpluses properly

Model forecasts assist treasurers in identifying potential surpluses and efficiently allocating excess funds, allowing companies to see a wider range of possible futures, enabling them to be much better positioned to capitalize on the unexpected opportunities that will arise by maximizing the use of idle cash for growth opportunities.

Control foreign exchange risk

Identify FX rates fluctuations, use scenario modeling in cash forecasting, and manage or minimize FX risks through accurate repatriation.

Capturing scenarios accurately through AI cash flow forecasting for informed decision-making

In light of macroeconomic fluctuations, it is in every CFO and senior finance executive’s interest to make sure that they invest in a treasury solution that helps them make accurate data-driven and timely business decisions.

HighRadius cash flow forecasting software helps to identify various scenarios and incorporate them into cash forecasts to understand the impact of those scenarios on their cash flows in real-time. Schedule a demo, to learn how capturing scenarios through cash forecasting can help you improve your decision-making significantly.

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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.