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Three Tips to Master Long Term Forecasting for Making Strategic Investment Decisions

What you’ll learn

  • Learn long term cash forecasting methods to make strategic & confident decisions for business expansion.

Why does treasury use long term cash forecasting methods?

Long-term cash forecasting, often known as indirect cash forecasting, is a cash forecasting method for understanding if current decisions will have long-term implications. It forecasts cash flows for periods of six months to five years, including investments and borrowing, using a pro forma balance sheet and profit and loss statement. Ending cash balances are derived by subtracting non-cash charges from net income and factoring in projected balance sheet adjustments. Here are the top 3 tips to help treasury for improving their long-term cash flow forecasting.

3 Tips to master long-term cash forecasting

Tip #1: Understand the purpose of long-term cash forecasting/indirect cash forecasting

Long-term forecasting helps in avoiding last-minute hurdles. The need for long-term cash forecasting are:

  • Stay financially stable by planning outlays on capital expenditure in advance.
  • Take steps toward achieving the FP&A goal to boost profitability.
  • Understand variances in forecasts and dig into the focal point of error to make corrections and mitigate risks.
  • Eliminate the need to maintain a higher cash buffer to save interest costs.
  • Quantify profits by reducing borrowing costs.
  • Review the quality, update, or replacement dates of assets to save for new acquisitions, and find buyers for depreciating assets.

Tip #2: Improve forecasting accuracy of long-term cash forecasting

Due to the volatility, most businesses find it difficult to forecast A/R and A/P. However, even for complex cash flow categories, adequate models and algorithms and AI cash forecasting can be used to improve accuracy.

Four pillars to enhance accuracy

  • Approach: Roll-up forecasts from local to global level for the entity, company code, country, and currency to increase visibility.
  • Data Gathering: Use API integration, imports and exports, and other means, to automate data collection from diverse sources such as banks, ERPs, TMS, FP&A tools, Payroll, A/R, and A/P teams.
  • Modeling: Use specialized models for each cash flow category. For example, use AI models to create long-term forecasts for complex categories such as A/R and A/P, and heuristic models for simpler cash flow categories like payroll, taxes, and so on.
  • Variance Analysis: Compare forecasts to actuals and find the deviations and the root causes of variance frequently to receive a superior report and make informed data-driven decisions.

Leverage AI cash forecasting to obtain accurate forecasting results

  • Overcome the roadblocks in spreadsheet: Spreadsheet-based data crunching and aggregation is time-consuming, error-prone, and reduces long-term visibility. Whereas, granular visibility is improved through drill-down capabilities into entity-level data. Furthermore, without having to hunt through different spreadsheets and portals, teams can readily access data at any moment.
  • Recognize economic downturns: Long-term forecasts are inherently unreliable due to the unpredictability of economic downturns. But, through a feedback loop model and frequent variance analysis, long-term cash forecasting accuracy is increased utilizing AI cash forecasting. Accurate data improved decision-making for borrowing, investing, and M&A.
  • Abundance of historical data: It could be challenging for businesses that don’t have enough historical data to work with. The organization may face financial consequences if the forecasts fail due to a lack of data. However, automated cash forecasting software easily integrates with ERP, TMS, banks, payroll, and tax systems, among other systems.
  • Incorporating scenario analysis: Scenario modeling provides investors with tangible, measurable information to improve decision-making for investments and to mitigate potential losses, concentrating on long-term forecasting by avoiding worst-case scenarios, for instance, cash crunches, M&As, capital expenditures, etc.

Tip #3: Choose an appropriate system that meets the long term cash forecasting requirements

The ultimate purpose of technology review is to find a solution that fits long-term needs. The treasury software can be chosen in a variety of ways:

  • Learn about the latest technological alternatives and features offered by SaaS companies (both online and offline) by using Google, LinkedIn, or visiting conferences.
  • Analyze software using AFP, Strategic Treasury, Bob’s Guide, or other treasury technology tools.
  • Visit vendor websites to obtain product information and read customer testimonials to gain a better idea of the product’s capabilities.
  • Evaluate the pain points to see how well the company’s solutions help the company grow and produce revenue.
  • Schedule an initial call or a brief demo to understand:
    • The company’s existing landscape or procedure
    • The present issues and difficulties
    • The ‘must-haves’ and ‘extras,’ and the priorities
    • The budgeted amount
    • The timetables
Schedule a demo to understand how to invest in AI cash forecasting to improve the accuracy in long-term cash forecasting 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.