Cash forecasting: art or science?

Published: Sep 2023

Cash forecasting lies at the heart of the corporate treasury skillset. However, advances in data technology mean it may be time to review how you approach this critical task.

Ask any corporate treasurer what their focus is for the year ahead, and you’re likely to hear cash forecasting mentioned. That should be no surprise: getting the forecast wrong can lead to market and reputational risks.

Yet, cash forecasting is an inherently inaccurate discipline. Where accountants can look back with some certainty at what happened in the past, treasurers need to know what their cash requirements will be in one, two, or six months – and that’s based on constantly-changing information from across the business.

The art of cash forecasting is in reducing the degree of inaccuracy. That means pulling current information from across the organisation, from payables to receivables, and from outside sources such as multiple bank accounts. Then, that information needs to be gathered in one place and one format to be analysed and used as the basis for a solid forecast.

In a typical corporation, that data is spread across multiple departments and systems and often held in different formats. That makes modern cash forecasting an exercise in data collection, scrubbing and normalisation, even before treasury’s expertise is applied to the problem. In the past, this has led some treasurers to simply abandon attempts at accuracy.

If you want to upgrade your approach to cash forecasting, here are some points to consider:

Five steps to better cash forecasting

1. Understand the process

Before turning to technology, make sure you understand your corporation’s existing processes. Unwrap treasury workflows to understand the way cash moves through the organisation. Without a complete understanding of the cash flow process, your forecast will never be as accurate as it could be.

2. Update your systems

Don’t be tied to a ‘one system does it all approach’ – modern, open source and best-of-breed technologies allow treasury to connect multiple systems to pull together and ‘normalise’ data from various sources. Of course, spreadsheets have their place, but are you sure you are applying the best possible technology to this critical treasury task?

3. Treasury is not an island

Treasury might ‘own’ the cash forecast, but if people and teams across the organisation are not cash-focused and delivering the correct information, it will always be hard to get anything near accuracy. Collaboration across the enterprise is essential, and cash-based KPIs and incentives can help focus minds on delivering better data for treasury to use.

4. Examine the data infrastructure

Genuinely useful cash forecasts depend on decent data. Data now flows throughout a successful organisation, and those that best maintain and manage data will generate the best forecasts. This may call for investment in data systems and onboarding the right expertise well beyond treasury to build a true ‘Data House’ in which data from multiple sources is normalised and aggregated to form the basis for business insights.

5. Don’t (just) look back

A large part of cash flow forecasting has traditionally been based on historical information, extrapolating from that to make predictions. Today’s data tools allow for a more forward-looking approach based on a constantly-changing data landscape. It’s time to change the treasury mindset.

Where next?

If your cash forecasting process hasn’t been updated in recent years, it’s probably time to review what you’re doing and how you’re doing it. Cash forecasting may never be an actual science – there are too many variables for that – but by applying the right tools and a forward-looking approach, your forecast can be an ever-more reliable tool for treasury and for the wider business.

For more information on cash forecasting techniques and the CashPro forecasting solution, speak to your Bank of America representative or visit business.bofa.com

Keep an eye out for next month’s Thought for the Month.

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