Cash flow forecasting is the lifeblood for any treasury department, which is why teams cannot afford to get it wrong. After all, forecasting cash flow enables organisations to better understand their capabilities, manage outstanding debt obligations and guide direct future investments.
With interest rates at record lows, for corporate treasurers with good access to credit and capital markets, the cost/benefit of proper cash flow forecasting may not seem justifiable. However, in today’s uncertain economic and geopolitical environment, it is clear that treasurers can no longer ignore liquidity risk.
In today’s marketplace, there is a wide variety of cash flow forecasting software and management tools available. What they all have in common is the ability to interact with different systems, automate the collection and consolidation of data, perform basic ‘what-if’ scenarios and standard reports.
Our world currently presents a volatile environment; major economic and political surprises such as Brexit, worsening relations between the US and China and an unpredictable world economy in general, are events today’s treasurer deals with on a day-to-day basis. These factors can stress corporate cash flow at any time.
Against this backdrop, corporates with a mindset on cash that are able to think in cash flows enjoy a much better position for survival than others. As the saying goes: “forewarned is forearmed”, so regardless if interest rates rise or fall, accurate cash flow forecasting is not just important, it’s essential.
The key is understanding every department’s plans. To take some examples, treasurers should make an effort to understand what the mergers and acquisitions team is thinking, or if more factories need to be built, for example. A good understanding of the longer-term cash flow allows for careful planning.
“It’s all about being prepared and understanding what the organisation is doing so that you can actually be prepared and be slightly ahead of the game,” says Sarah Boyce, Associate Director, Policy and Technical at The Association of Corporate Treasurers (ACT). “Should the finance team say it wants to borrow money, or wants to sell an asset, treasurers will be one step ahead. Armed with accurate data, they will have plenty of ideas of how to raise the cash, or what might be done with it.”
Even though rates are low, they do still offer an opportunity for those organisations with the right tools and strategies in place to capitalise upon these trends. But fail to adequately prepare for an increase or further cuts and teams could end up destroying value in their organisations pretty quickly.