Custom Image

The Importance of Centralization in Cash Forecasting


Learn the difference between decentralized and centralized cash forecasting. Understand how centralization enhances the efficacy of cash forecasts.

Contents

Chapter 01

Importance of cash flow forecasting

Chapter 02

Decentralized vs. centralized forecasting

Chapter 03

Characteristics of decentralized cash flow forecasting

Chapter 04

Drawbacks of the decentralized process

Chapter 05

Characteristics of centralized cash flow forecasting

Chapter 06

Reasons for adopting centralized forecasting
Chapter 01

Importance of cash flow forecasting


Treasury priorities over the years

Importance of cash flow forecasting

Cash flow forecasting has always been a top priority for treasury, and its importance has been exacerbated during the pandemic. Treasurers are finding it difficult to manage liquidity due to challenges in forecasting cash, arising due to scattered landscape and spreadsheet-driven processes.

Chapter 02

Decentralized vs. centralized forecasting


Decentralized vs. centralized forecasting

Decentralized cash forecasting

Centralized cash forecasting

Approach

Local forecasts are created at an entity level by gathering data from internal teams.
Local forecasts are rolled up to the central treasury. It’s also called bottom-up forecasting.

Granularity

No granular visibility across cash flows.
Granular visibility across all cash flows.

Impact

High turnaround time for creating a consolidated central treasury forecast.
Continuous data visibility across all systems. Helps in understanding how transaction-level activities influence global forecasts.
Chapter 03

Characteristics of decentralized cash flow forecasting


In the decentralized approach, each entity generates its local forecast consisting of its own set of currencies, ERPs, and customers. Decentralized cash flow forecasting relies mostly on spreadsheets. Its characteristics are:

1. Visibility: Low visibility due to:

  • Data scattered across disparate sources
  • Inability to track A/R and A/P cash flows
  • Inability to perform repatriation due to limited global visibility

2. Accuracy: Low accuracy due to:

  • Manually aggregating data from different sources
  • Difficulty to roll-up local forecasts to the central treasury
  • Difficulty in identifying the cause of variance due to limited granularity

3. Frequency: High turnaround time due to manual activities and scattered landscape limits the cadence of forecasting.

Characteristics of decentralized cash flow forecasting

Due to low visibility, accuracy, and frequency, the efficacy of the forecast takes a hit and leads to certain drawbacks.

Chapter 04

Drawbacks of the decentralized process


  • Delayed reporting: It’s difficult and time-consuming to generate a central forecast. As a result, reports are dead on arrival, which affects decision-making.
  • Poor decision-making: Siloed operations limit granular-level visibility. Low visibility hinders decisions about investments, business expansion, M&A, repatriation, etc.

The shortcomings of decentralized cash forecasting can be avoided by adopting centralized cash forecasting.

Chapter 05

Characteristics of centralized cash flow forecasting


In centralized cash flow forecasting, local forecasts based on different regions, company codes, cash flow categories, and currencies are rolled up to generate a global forecast.

Characteristics of centralized cash flow forecasting

A centralized system enhances visibility into cash flows, boosts cash flow forecast accuracy, and supports forecasting due to the following reasons:

1. Visibility: Provides granular visibility across different cash flows categories, entities, ERPs, allowing drilling into individual lower-level forecasts. Moreover, centralization allows tracking specific customer accounts or transactions to determine variance sources for high variance categories such as A/R. It also provides the ability to track cash movements.

2. Accuracy: Centralized forecasting allows forecasting of individual cash flow categories of different entities rolling up to the central forecast, thereby significantly increasing baseline accuracy.

3. Frequency: Forecasts are easily replicated, and changes can be tweaked since the turnaround time is decreased. Hence the cadence is increased.

Chapter 06

Reasons for adopting centralized forecasting


Centralized forecasting offers better control over the organization’s activities by ensuring consistency in operations and uniformity in decision-making. It also offers a better understanding of ‘what-if’ scenarios and their impacts on cash flows.

Impact of centralized cash forecasting

1. Continuous data visibility across all systems
It is easier to monitor cash categories like A/R, A/P, taxes, payroll across different geographies, horizons, company codes, etc., and access data at all times. Additionally, variance drivers are identified easily to understand the deviation between forecasts and actuals.

2. Ability to understand how transaction-level activities influence global forecasts
Centralized forecasting enables drilling down into cash flows with invoice-level granularity. Thus, treasury gains a better understanding of mitigating the potential risks and can redirect their decisions towards high-priority areas.

3. Improved scalability and standardization
The process doesn’t break when a new system is added. Moreover, the process can be replicated/ halted when a new company is acquired. Once the system is running, frequent human intervention is not required.

4. Improved strategic financing decisions
Real-time and accurate forecasts are created through centralization and are updated to provide real-time insights. As a result, CFOs can drive timely and confident decisions towards debts, investments, M&A, repatriation, etc.

With the changing business landscapes, companies and their treasuries emphasize the centralization of treasury functions. Companies have moved towards or are actively considering a centralized structure for better monitoring cash flows, especially in light of the macroeconomic fluctuations, by leveraging technologies such as AI to improve cash forecasting.

Chapter 01

Importance of cash flow forecasting


Treasury priorities over the years

Importance of cash flow forecasting

Cash flow forecasting has always been a top priority for treasury, and its importance has been exacerbated during the pandemic. Treasurers are finding it difficult to manage liquidity due to challenges in forecasting cash, arising due to scattered landscape and spreadsheet-driven processes.

Recommendations


Blog

Innovate to Achieve Shared Service Success

Abstract

Innovate to Achieve Shared Service Success – Executive Roundtable Brought to you by…

4 Min

Blog

A 360-degree View on Increasing Accuracy while…

Abstract

Lessons learned from Covid-19 In 2020, many businesses’ resilience was tested, and many…

4min

Blog

Better Together: Striking the Balance between Artificial…

Abstract

Discover the changing role of the Credit Risk function and the importance of…

5 min

There’s no time like the present

Get a Demo of Cash Forecasting Cloud for Your Business

Request a Demo

Request Demo Character Man

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.