What are the key challenges and risks of cash forecasting and budgeting alignment in a volatile market?

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Cash forecasting and budgeting alignment is a crucial process for any treasury function, especially in a volatile market. It helps to optimize liquidity, reduce borrowing costs, and support strategic decision-making. However, it also involves many challenges and risks that need to be addressed and mitigated. In this article, we will explore some of the key issues and best practices for cash forecasting and budgeting alignment in a dynamic and uncertain environment.

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Nicholas Franck

Treasury Executive | Experienced as Client and Supplier | Strategic Thinker | Implementer | Consultant | Trainer |…
Pooja Singh

Experienced SAP Treasury Consultant

1 Data quality and accuracy

One of the main challenges of cash forecasting and budgeting alignment is ensuring the quality and accuracy of the data used for both processes. Data can come from various sources, such as bank statements, ERP systems, invoices, sales orders, and market indicators. However, data can also be incomplete, outdated, inconsistent, or inaccurate, leading to errors and discrepancies in the forecasts and budgets. To overcome this challenge, you need to establish clear data governance rules, validate and reconcile data regularly, and use standardized formats and definitions across the organization.

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Nicholas Franck

Treasury Executive | Experienced as Client and Supplier | Strategic Thinker | Implementer | Consultant | Trainer | Entrepreneur | (Procurement, Technology, Behavioural, Organisational & Data Science Expertise)
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Don't be afraid to ask different units different levels of detail. Some units will mainly have cashflows in currencies that aren't volatile versus your home currency. Others, despite being volatile, will have a small effect on foreign exchange gains and losses. Categorise them into 4 categories (volatile and high-amount, volatile and low-amount, non-volatile and high-amount, non-volatile and low amount). Put most effort into collecting data, understanding it, then improving its quality in units with high-amount and volatile, to get maximum return on investment. Then high-amount and no-volatile - high amounts can have disproportionate effect and non-volatile can become volatile. And so on. Review these categorisations at least yearly.

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Pooja Singh

Experienced SAP Treasury Consultant
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It's like predicting the weather in a storm! With rapid changes in market conditions, accuracy becomes a challenge. Unreliable data and complex models add to the headache. Cash flow unpredictability can throw budgets off track, impacting financial stability. Risk management is crucial, but frequent revisions and transparent communication are key. It's a balancing act in a constantly shifting landscape!

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2 Forecasting methods and assumptions

Another challenge of cash forecasting and budgeting alignment is choosing the appropriate forecasting methods and assumptions for different time horizons and scenarios. Forecasting methods can range from simple extrapolation to complex statistical models, depending on the level of detail, reliability, and flexibility required. However, forecasting methods also depend on the availability and quality of data, as well as the assumptions made about future events, such as sales, expenses, exchange rates, and interest rates. To overcome this challenge, you need to evaluate the pros and cons of different forecasting methods, test and validate your assumptions, and update your forecasts regularly based on actual performance and market conditions.

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3 Communication and collaboration

A third challenge of cash forecasting and budgeting alignment is ensuring effective communication and collaboration among the various stakeholders involved in both processes. These stakeholders can include treasury, finance, accounting, business units, and external partners, such as banks, customers, and suppliers. However, communication and collaboration can be hindered by silos, conflicts, or lack of trust among the stakeholders, leading to misalignment, duplication, or gaps in the forecasts and budgets. To overcome this challenge, you need to establish clear roles and responsibilities, create a common language and framework, and use integrated tools and platforms to share and consolidate information.

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4 Variance analysis and feedback

A fourth challenge of cash forecasting and budgeting alignment is conducting variance analysis and feedback to measure and improve the accuracy and usefulness of both processes. Variance analysis is the process of comparing the actual cash flows and positions with the forecasted and budgeted ones, and identifying the causes and impacts of the deviations. Feedback is the process of communicating the results of the variance analysis to the relevant stakeholders, and implementing corrective actions or adjustments if needed. However, variance analysis and feedback can be difficult due to the complexity, frequency, and granularity of the data, as well as the resistance or complacency of the stakeholders. To overcome this challenge, you need to define clear metrics and targets, use automated and visual tools to facilitate analysis and reporting, and foster a culture of learning and improvement.

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CA Naveen Bist

DGM | HOD | Over a Decade of Experience (12+ Years) | Beyond Revenue, Costs, and Budgets | Emphasizing Risk Management, Performance, and Accuracy" | Fitness enthusiast
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Merely making budgets won't give benefits. 1. It has to be followed with monthly variance analysis. 2.Deviations have to be checked & studied. 3.Any increase & decrease in budgets has to be thoroughly worked upon. 4. In fact, any abnormal decrease in expenses also needs to be addressed. 5. If required, with the help of trends we can shift or postpone or avoid any budgeted expenses.

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5 Scenario planning and contingency

A fifth challenge of cash forecasting and budgeting alignment is incorporating scenario planning and contingency into both processes to cope with the volatility and uncertainty of the market. Scenario planning is the process of creating alternative forecasts and budgets based on different assumptions and events, such as best case, worst case, or most likely case. Contingency is the process of preparing and executing contingency plans or actions in case of unexpected or adverse situations, such as liquidity shortages, currency fluctuations, or market disruptions. However, scenario planning and contingency can be challenging due to the unpredictability, complexity, and frequency of the market changes, as well as the trade-offs and costs involved in the contingency plans or actions. To overcome this challenge, you need to monitor and anticipate the market trends and signals, use flexible and dynamic models and tools to generate scenarios and plans, and prioritize and optimize your liquidity and risk management.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Islam Monged CISA, CISM, CAMS

Senior Internal Audit Manager. I manage Retail Branches Operations, Wholesale, operational risk, market risk, credit risk & Treasury (front, middle and back offices) , Forensic audits
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6- Balancing short-term and long-term horizons Cash forecasting and budgeting often involve a trade-off between short-term liquidity management and long-term strategic planning. While treasury may be focused on ensuring sufficient cash to meet near-term obligations, business units may be more concerned with investing for future growth. Aligning these different time horizons requires a collaborative approach that balances risk and return. This may involve setting different levels of detail and frequency for short-term and long-term forecasts, using rolling forecasts to adapt to changing conditions, and establishing clear guidelines for liquidity buffers and investment hurdle rates.

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Islam Monged CISA, CISM, CAMS

Senior Internal Audit Manager. I manage Retail Branches Operations, Wholesale, operational risk, market risk, credit risk & Treasury (front, middle and back offices) , Forensic audits
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7- Integration with risk management Cash forecasting and budgeting are closely linked to financial risk management, particularly in areas like foreign exchange, interest rates, and commodity prices. Volatility in these markets can have a significant impact on cash flows and liquidity. To manage these risks effectively, cash forecasting and budgeting processes should be integrated with the company's overall risk management framework. This may involve using hedging instruments to mitigate exposures, stress testing forecasts under different risk scenarios, and establishing clear risk limits and escalation protocols.

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What are the key challenges and risks of cash forecasting and budgeting alignment in a volatile market?

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1 Data quality and accuracy

2 Forecasting methods and assumptions

3 Communication and collaboration

4 Variance analysis and feedback

5 Scenario planning and contingency

6 Here’s what else to consider

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