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Scope of Accurate Cashflow Projections in Treasury

What you’ll learn

  • Discover the importance of accurate cash projections
  • Identify the top five challenges to achieving accurate cashflow projections
  • Learn the scope of accurate cashflow projections with treasury solutions

Why are accurate cash flow projections important?

Accurate cash flow projections enable businesses to estimate their future cash positions, prevent crippling cash shortages, and maximize the return on any cash surpluses they may have. Accurate cash projections enable organizations to manage total cash flow and cut excessive spending.

The recent joint survey conducted by HighRadius in association with Treasury Webinars during Q2 of 2021 showed that larger organizations achieve the highest accuracy of 95% and above in their forecasts, while the smaller organizations tend to have less than 80% accuracy.

Accuracy of cash flow projections:

Accuracy of cash flow forecasting with respect to the business size

Accuracy of cash flow forecasting w.r.t. organization size

  • 57% of major firms can use the data and reach 95% accuracy or greater due to technology like AI, APIs, RPAs, etc.
  • 34% of medium-sized firms have 80% to 85% accuracy because they are still in the developing phase and cannot use the data effectively.
  • 33% of the small firms reported <80% accuracy since they lack relevant tools to use the available data adequately.

How do you gather data for an accurate cash flow forecast?

Direct cash flow forecasting helps treasury manage a business’ day-to-day cash and funding requirements and aid financing and investment decisions. In direct cash flow forecasting, actual cash flows get reflected in the forecast as close to real-time to build forecast accuracy. To perform direct cash flow forecasting, these things need to be pulled from financial systems:

  • Opening cash balance for the forecasting period is usually taken from the most up-to-date and accurate reflection of current positions.
  • Cash inflows for the forecasting period include anticipated sales receipts from within the forecasting period. Other cash inflows are intercompany funding, dividend income, divestments’ proceeds, and third parties’ inflows.
  • Cash outflows for the forecasting period include capturing wages and salaries, rent, investments, bank charges, and debt payments.

What are the common causes why cash flow projections are not accurate?

4 Common causes of inaccurate cash flow projections

  • Restricted visibility of cash flows:  

    Cash flow visibility is limited if a company has a complicated organizational structure and is widely dispersed. The first step is understanding the available cash for seeking external borrowing or optimizing ROI. However, treasurers also need the appropriate tools to help forecast future cash flows and inform relevant parties. 

    Here are some of the common challenges in gaining cash flow visibility:

    • Disparate data scattered across disconnected data sources 
    • Top-down forecasting approach
  • Inaccurate modeling: 

    Inadequate models or inefficient algorithms can result in high variance. The forecasts are typically off since appropriate models aren’t applied for the various cash flow categories. In addition, the bandwidth available for upgrades or a higher frequency of variance analysis is limited due to manual modeling.

  • Poor variance analysis:

    Most manual tasks lead to less bandwidth for analysts to perform variance analysis. Inability to identify variance sources can lead to low accuracy in cash forecasts and subjective decision-making.

  • Non-standardization and decentralization: 

    Lack of standardization leads to poor risk management. Moreover, a decentralized process resulted in ineffective decision-making and delayed reporting.

Problems for mid-market businesses due to poor cashflow projections

The following are some of the impacts of inaccurate cash forecasts that mid-market companies face:

  • Lack of global visibility and low cash forecast accuracy leads to overspending or overborrowing, where mid-market treasurers may be unable to keep their budget in check and overborrow at higher interest rates.
  • Inaccuracy in cash forecasting causes delays in data-backed reporting, making it harder for treasurers to gain a historical trend analysis and worldwide visibility over the organization.
  • Inaccurate cash flow forecasting leads to an inability to quickly track KPIs and metrics resulting in poor corporate decisions and operational efficiency.
  • A mid-market company may be unable to identify cash shortfalls due to poor scenario analysis, and it may run out of liquidity, face higher debt, or go bankrupt.
  • Due to data-backed reporting being delayed in the indirect cash flow forecasting process, it is difficult for treasurers to acquire historical trend analysis and global visibility over the business’ cash flows. Additionally, this has an impact on forecasting turnaround time and accuracy, which leads to poor decision-making.
  • Due to manual processes, cash flow risks are difficult to assess, and currency fluctuation significantly impacts the profit and loss statement.

Scope of accurate cash projections with automated treasury solutions

Here is the potential of accurate cashflow projections by leveraging automated treasury solutions:
Scope of accurate cash projections with automated treasury solutions

  1. Enhances efficiency
  2. Forecasting automation eliminates manual labor and allows employees to focus on higher-value tasks.

  3. Recognizes and prepare for the liquidity crisis
  4. Cash forecasting using automated treasury solutions provides the foresight to take remedial action. Additionally, companies can predict future cash gaps and minimize missing payments with an accurate cash forecast.

  5. Reduces variance and increases accuracy
  6. Companies achieve low variance and high accuracy by leveraging cash forecasting automation to speed up reporting, addressing the reasons for the deviations, and testing the accuracy of the current forecast. High accuracy due to direct cash flow forecasting leads to confident investment and borrowing decisions.

  7. Provides an overview of scenarios
  8. Accurate cash flow projections capture ‘what-if’ scenarios and help execs develop business strategies to avoid losses.

  9. Prevents FX risks
  10. It helps manage and limit the risk associated with foreign exchange. The treasury department can anticipate cash demands and reduce FX losses using cash forecasting software.

  11. Connects workspaces
  12. The connected workspaces improve collaboration by democratizing your forecasting process with cloud workspaces where multiple users can share inputs and feedback and refer to all the data from a single source of truth. 

  13. Enhances reliability
  14. Delivering forecasts with high accuracy and minimal variance regularly helps gain senior management’s confidence.

  15. Improves visibility
  16. Automated treasury solutions generate cash projections at the currency, entity, or regional levels, then roll them up to the global level across all cash flow categories to enable global cash visibility, enhanced cash repatriation, pooling, and hedging over the short and long-term.

  17. Improves confident decision-making
  18. Accurate cash flow projects increase the confidence in data, improving the ability to make more strategic and proactive decisions.

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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.