Understand the role of cash forecasting during an economic crisis and learn three best practices for cash forecasting during a volatile environment
CFOs are demanding greater accuracy at regular intervals and more frequent updates to current cashflow forecasting data for tackling market volatility. The treasury department must frequently re-forecast during a recession since working capital is a big concern, but acquiring data and working with teams is time-consuming.
During high economic volatility, measuring the Cash Conversion Cycle (CCC) during high economic volatility becomes necessary to make working capital decisions.
A real-time cash flow forecast gives companies the crystal-clear perspective they need to implement corrective measures like tweaking payment and collection procedures, selling off assets, or approaching lenders. It allows the treasury department to make decisions based on current economic conditions rather than a potential budget that may have been set months ago. Businesses that consistently carry out cash forecasting can foresee potential financial shortfalls and prevent missing payments.
Frequent forecasting over several time horizons, such as weekly cash forecasting, can help understand market movements like changes in raw material prices, interest, and commodity rates. It can also give the most precise, up-to-date picture of short-term cash balances and anticipated liquidity needs.
The weekly cash forecasting makes businesses more aware of the specifics of their operations. Cash inflows could be significant one week if a lot of receivables are collected, while cash outflows could be significant the next week if rent and payroll are due.
Here is the following importance of weekly cash forecasting:
Variance analysis is a quantitative method for estimating the discrepancy between projections and actuals. Variance in cashflow forecasting refers to the disparity between the forecast and actual for a particular accounting period. Variance analysis aids in spotting potential risks, mitigating them, and making proactive choices regarding adjustments to needed corporate plans.
Using the conventional technique, it is challenging to pinpoint the real cause of the deviations between the forecast and actuals. A cash forecasting system digs deep into forecast deviations across complex cash flow categories like A/R and A/P, regional and corporate levels to identify, document, and address the causes of forecast variances. To improve the cash forecast accuracy by 90-95%, AI also makes further revisions to the forecast by assessing past and present forecasts and the high variance categories over various time horizons.
Only 33% of businesses are successful in improving their cash flow visibility. Monitoring cash flow in real-time is essential for maintaining stable business operations. Companies should adjust their business continuity plan to identify and address any vulnerabilities in crises. Unfortunately, due to process limitations, most businesses do not have complete visibility into their financial flows, which leads to inaccurate cash forecasts.
As a result, businesses frequently overborrow or borrow late with higher interest rates due to their failure to predict impending cash shortages. Delaying payments for longer periods might result in penalties, such as paying late fees or poor relationships with external stakeholders.
Accurate forecasts enable timely and efficient collaborative planning and facilitate treasurers to make fact-based decisions. Accurate forecasts increase the ability to:
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.