Cash flow Forecasting

Why cash forecasting?

A cash forecasting model is an essential tool for treasuer to manage working capital. Forecasting preempt treasurer of

1. Early warning of potential payables in future which resulted in preparing optimal cash reserves early to meet this obligation.
2. Optimize cash buffers. Having information about projected cash inflows allows treasuer 
• To invest the surplus in a reasonable amount
• Reduce the burden of having too much cash 
• Reduce losing an opportunity to invest in higher yielding products (short term).

Source of information to structure cash forecasting

Information is sourced from 2 key areas internally, mainly from treasury and business flow. 

• Treasury: Cash balances (Accuracy depending on getting timely information on accounts eg: MT942 updates, using sweeping/pooling solutions), FX related transactions (eg: forwards, swaps), investments
• Business: Payables, receivables from finance, sales team
• Other sources of information can be retrieved from industry reports from government associations, business magazine or forecast service companies focusing on specific industries.

The accuracy of the forecasting depends on the information feed into the model. For a reasonable degree of accurate forecasting, as much as possible, scheduled items must be included, for example, payroll, monthly bills/expenses & regular receivables.

The impact of different sources & time frame may result in less accuracy in forecasting.

1. Using weekly payment & receivables provide accurate forecasting between 1 to 2 month period
2. Using 3 to 6 months projection, for example using information from industry reports & forecast are less accurate compared to the former
3. Using a budget 0r sales forecast for longer projection

Improving cash forecasting accuracy

Improving its accuracy requires automation and constant feedback and checks on the forecasts. 

1) Automation helps to gather and consolidate different inputs/sources can significantly improve reliability and accuracy. It also helps the treasurer to direct their time and focus on other productive aspects of their work scope. 

However, even with automation, inaccuracy still exists. For example:

Payables & Receivables

Potential problems where invoices are sent/mailed by suppliers and invoices are circulated internally for approval resulting in appearing late compared to the forecast as it is key into account system. This is common in companies with old practices that require a signature on the invoice from management to approve the payments.

As for receivables, companies may issue late invoices if there are no ERP to manage the collections.

Solution: 

A possible solution is to input the invoices into the system first before sending out for approval. Or establishing with suppliers to submit invoices directly into TMS or ERP system. 

For receivables, a possible solution is to use direct debit for prompt collections or automate the generation of invoices and send to customer ERP system directly.

Sales forecasts

Sale team are reluctant to provide detailed forecasts as they do not want to be held accountable

Solution: 

Getting constant feedback from sales and regular reviews with a compensation plan for them.

2) Regular reviews on the forecasts by having regular reviews on the forecast and compare with previous forecasts by having controls to investigate variances from preceding forecast to verify the changes. Matching forecast against a checklist helps to review if anything is missed out. Lastly getting approval from all various department and sources to verify and contribute.

Forecasts should distribute regularly to match periodic of outflows and inflows. Forecasts should also be updated monthly/quarterly/annually to reflect the business cycle and changes.

Summary

1. To create a better cash forecasting tool, it is advisable to establish process and procedures and checklist on the source of information by treasury staff. 
2. Establish the source of information, dates, amount from:
• Payroll dept on schedule payments 
• Payment dept on payments
• Collections dept for receivables
• Treasury or finance on investments, capital expenditures intercompany loans
• Sales forecasts from sales dept based on past history of sales outstanding
• Company expenses
3. Review and apply reasonable views on the sources and draft forecasts
4. Approved and issue the forecast