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Last updated on 2024年7月2日

What are the best practices for validating and improving the accuracy of your cash forecasts?

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Cash forecasting is a vital function for any treasury department, as it helps you plan your liquidity needs, optimize your cash utilization, and mitigate your financial risks. However, cash forecasting is also a complex and challenging process, involving multiple data sources, assumptions, scenarios, and uncertainties. How can you ensure that your cash forecasts are accurate, reliable, and actionable? Here are some best practices for validating and improving your cash forecasting process.

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1 Define your objectives and scope

Before you start forecasting, you need to have a clear idea of what you want to achieve and how you want to measure it. What are the main drivers of your cash inflows and outflows? What are the time horizons and frequencies of your forecasts? What are the key performance indicators (KPIs) and tolerances for your forecasts? How will you use your forecasts for decision making and reporting? Defining your objectives and scope will help you focus your forecasting efforts and align them with your business strategy and goals.

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Patrick R. Carr, CTP

Director @ Fresenius Kabi USA | Certified Treasury Professional | TMS Expert
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Start with short term forecasting key to understand cash flows and helps translate to how to define the long term forecast. 1. Start by cleaning up AP and AR. Remove aged items by write off or settling with customers / vendors. 2. Work on reducing time to post invoices for AP to less than 5 days. This gives greater visibility to outgoing payments. 3. Align with customers to reduce aged items to have an accurate view of incoming payments and timing. Use historical trends to help anticipate incoming cash flows 4. Align with Tax and Payroll to identify outgoing payments for non AP types. 5. Minimize the use of auto debits to those that are benefit related to have predictable outgoing cash flows 6. Freeze forecasts to do variance analysis

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2 Gather and reconcile your data

The quality of your data is the foundation of your forecasts. You need to collect and reconcile data from various sources, such as bank accounts, accounting systems, sales pipelines, budget plans, and market indicators. You also need to ensure that your data is consistent, complete, and timely. You can use cash forecasting software and tools to automate and streamline your data collection and reconciliation process, as well as to identify and resolve any data discrepancies or gaps.

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Patrick R. Carr, CTP

Director @ Fresenius Kabi USA | Certified Treasury Professional | TMS Expert
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1. Automate reconciliation process by connecting disparate systems (ERP, Bank etc) 2. Align direct cash flow categories with budget indirect cash flow to drive better longer term forecasts. Utilize TMS to do so. 3. Utilize a combination of forecasts and historical data to help build longer term cash flow forecasts. 4. Create a way to do a variance analysis to identify areas that require improvement.

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Renea M.

Treasury Tech | Program Management | AI & Blockchain | Neuroscience and Pilates Enthusiast
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Analyzing all processes which result in a cash flow item is key in gathering data from various sources. Consider the horizon of your forecast, if it is near-term you will need to compile data from your bank accounts and upcoming payment runs. If it is further into the future, you will need to consider cash flows generated from Accounts Receivables, Accounts Payables, Treasury financial instruments, Payroll etc. Gathering and reconciling data is the most important part of the exercise of cash forecasting.

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Andy Tuckett

Catylex | Driving Customer Success
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Think through the basis of your data - depending on the level of sophistication that you aspire to consider starting with your contract cash flows and layering in various sets of behavioral assumptions to build your forecast for various scenarios.

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3 Apply appropriate methods and models

Depending on your objectives and scope, you may need to use different methods and models for your cash forecasts. For example, you may use a direct method for short-term forecasts, which relies on actual cash receipts and payments, or an indirect method for long-term forecasts, which derives cash flows from income statements and balance sheets. You may also use statistical or judgmental models, or a combination of both, to project future cash flows based on historical patterns, trends, and assumptions. You should choose the methods and models that best suit your data availability, accuracy, and complexity, and that can capture the dynamics and uncertainties of your cash flows.

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Patrick R. Carr, CTP

Director @ Fresenius Kabi USA | Certified Treasury Professional | TMS Expert
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Utilize a combination of tools to drive your forecasts. 1. Direct short term (13 weeks) - utilize AP, AR, Payroll, Tax and historical trends. 2. Long Term - combination of indirect (simplified for operating & Capex spend) and direct for interest, taxes, acquisitions, dividends etc.). Look at historical trends to identify timing of cash flows and understand NWC impact of payment terms 3. Freeze forecasts and do a variance analysis each month to help improve forecasts and identify areas of improvement for the budgeting process or better alignment of GL/Profit Center accounts to better call out cash related items.

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4 Review and validate your results

Once you have generated your forecasts, you need to review and validate them against your objectives and KPIs. You should compare your forecasts with actual results, as well as with other sources of information, such as market expectations, industry benchmarks, or peer analysis. You should also perform sensitivity and scenario analysis, to test how your forecasts respond to changes in key variables or assumptions. You should look for any deviations, errors, or anomalies in your forecasts, and investigate their causes and implications.

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5 Communicate and update your forecasts

Your forecasts are only useful if they are communicated and updated regularly. You need to share your forecasts with your internal and external stakeholders, such as management, business units, banks, and investors. You should also explain the assumptions, methods, and uncertainties behind your forecasts, and how they support your strategic and operational decisions. You should also monitor your cash flows and market conditions, and update your forecasts accordingly, to reflect any changes or new information.

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6 Learn and improve your process

Finally, you should always seek to learn and improve your forecasting process. You should collect feedback from your stakeholders, and measure and report your forecasting performance. You should also identify and implement best practices, such as standardizing your data formats, automating your workflows, integrating your systems, and enhancing your analytics. You should also leverage cash forecasting software and tools, to simplify and optimize your forecasting process, and to access more features, functionalities, and insights.

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Patrick R. Carr, CTP

Director @ Fresenius Kabi USA | Certified Treasury Professional | TMS Expert
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Identify ways to improve the reliability of your cash flow timing for your cash forecasts. This can be the use of pcards, T&E cards, vendor payment cards, Make payments to settle on due dates by aligning payment files and the value dates, reduce the need for last minute wires, reduction/elimination of direct ach debits on your accounts.

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7 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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What are the best practices for validating and improving the accuracy of your cash forecasts?

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1 Define your objectives and scope

2 Gather and reconcile your data

3 Apply appropriate methods and models

4 Review and validate your results

5 Communicate and update your forecasts

6 Learn and improve your process

7 Here’s what else to consider

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