Cash forecasting is the process of obtaining an estimate or forecast of a company's future financial position.

The primary goal of treasury is to ensure the organization has enough cash to meet its obligations over a certain time period. Thanks to most organizations partaking in the trend of having a forensic-level focus on cash, treasury has a much clearer view of the dynamics of and correlations between the various cash flows that make up the forecasts. With this enhanced knowledge, forecasting can be improved across all spheres of the organization — to everyone’s benefit.


Key Takeaways

1) Cash forecasting is not a “One Size Fits All Approach”. Your company’s focus on cash will best determine the approach to take and how much scrutiny there needs to be in planning.

2) Cash Forecasting is not done in a vacuum. Finding sources of information to improve your forecast might take time, but understanding the underlying drivers will certainly help. Partner with FP&A and other departments to do this.

3) Establish your end goal. But realize it’s a forecast, so it will need lots of tweaks and refinement, especially if you are trying to tie out to an operating plan or longer strategic plan.

4) Most importantly, know your model. In forecasting you are building a cash model essentially. If its machine based or in Excel, be the owner, know the inputs, outputs and be able to define them if asked.




Cash Forecasting Methods

Treasury forecasts tend to be built on operational cash receipts and disbursements. Their strategic purpose comes into play when they are developed over a longer period of time, which could be due to a desire to develop medium-term funding, investment plans, or support greater efficiency in the organization’s use of working capital.

There are three time periods used to develop forecasts: short-term, medium term, and long-term. We’ll talk about the different purposes of each period below, and provide you with some key points to consider that are unique to each one.


In order for a business to continue operating, the treasury team needs to understand the timing of cash flows so they can make provisions for raising funds — or placing funds in investment. On the extreme end of this is identification of your “burn rate,” or the speed at which your organization uses up its cash. Start-ups are typically most concerned with this, but we saw many organizations start monitoring their burn rate during the 2020 coronavirus pandemic lockdowns as revenues dried up and supply chain issues added a level of uncertainty that was previously unknown.

Short-term forecasts are always likely to be the most accurate. With a clearer view of the underlying cash flows that constitute short-term forecasts, treasury can better make strategic decisions in the following areas:

  • Working capital management. If you want to see when working capital is tied up in inventory or AP, monitoring cash flows can help. Things you’ll want to consider include the variability of the company’s costs and steps that can be taken to change the ratio of fixed to variable costs, such as reviewing the funding programs that might be in place.
  • Supply chain management. Look for patterns of change over the last two years of your short-term cash flows. In terms of robustness of the supply chain, both upstream and downstream, what do these patterns suggest? When it comes to paying the company’s suppliers, can you be more strategic? And finally, communications: what is the best way to communicate your insights to procurement, sales and the board?
  • Short-term funding strategy. There are two key items you need to think about here: flexibility and the cash flow implications of strategies designed to protect against the effect of rising interest rates.


Medium-term forecasting is more difficult. Why? Because the medium term is usually describing the period when payables and receivables are primarily forecasted from either budgets or previous years’ data rather than contracted procurement and sales.

Some cash flows, such as loan repayments and bondholder payments, are known and predictable. Many more remain uncertain (think revenues and tax remittances) as they’re tied to economic activity. So, when you’re developing a medium-term forecast, you have to build it out from sales and procurement in order to understand the expected physical transactions (e.g., raw material costs, production costs, employment costs) and anticipate cash flows over the next 3-12 months. With a better understanding of the nature of the underlying cash flows and their correlation, treasury can help bring more granularity to medium-term forecasts.


What is the purpose of a long-term forecast – looking out a period of more than a year? Long-term forecasts are used to support decisions made regarding capital allocation, long-term fundraising and to identify scope for mergers and other capital actions. While knowledge of individual cash flows plays a part, especially in terms of decisions on funding and the raising of capital, there are simply too many unknowns to produce accurate cash position forecasts over the long term.

How treasury adds value with long-term forecasts is by helping management understand the risks associated with different business strategies. For example, treasury can help management appreciate how the capital structure (i.e., the balance between debt and equity) could affect the company’s ability to raise emergency short-term financing, should the need arise.

Understanding how various strategic decisions could affect the company’s exposure to financial risk, and achieving a balance between risk and reward, is another way treasury can add value. Examples of financial risks include interest-rate exposure, timing of capital structure decisions, or foreign-exchange exposure if the company is considering expanding its overseas production facilities.




Building a Cash Forecasting Model

There is no single, correct way to develop a cash forecast. That said, there are a number of decisions that need to be made as part of the development of an effective forecast.

  1. Identify the data available and necessary to complete the forecast.
    This varies from one organization to another for two main reasons. One, some organizations may only want to forecast large-value items. And two, some organizations may only forecast central group positions, leaving business units responsible for managing their own short-term cash positions. The questions your treasury team will need to consider include:
    • Will forecasts be prepared at the business-unit level? This may be important if the group devolves payment decisions to business units.
    • Will forecasts be consolidated at the group level? If so, does this reflect the treasury’s ability to move funds efficiently between group entities? Note the importance of exchange controls and restrictions on intercompany loans in different locations.
    • If forecasts are consolidated, should all business units be part of that consolidated forecast? Should recent acquisitions, or divisions expected to be divested, be forecasted separately?
    • Will forecasts be prepared in a base currency, or will separate currency forecasts be prepared?
    • Will the forecasts incorporate a reserve or safety margin to accommodate inaccuracies? If so, how will the treasury determine these?
  2. Establish the best sources for data.
    Once the data sources have been identified, the team will need to ensure the same level of data is provided from each submitter. Avoid duplication by ensuring that each piece of data is provided by only one source. Some potential sources for data include:
    • The treasury management platform, whether a workstation or a set of spreadsheets.
    • Company planning documents, including business plans and sales forecasts.
    • Centralized financial departments, such as accounting and shared services centers.
    • Business units and operating companies, e.g., accounts payable and accounts receivable.
    • Automated bank data feeds and bank statements.
  3. Classify the data for accuracy and completeness.
    Regarding accuracy, you’ll want to determine if the data is a certain item, such as a tax payment or loan repayment; a predictable item, such as payroll; or a less than predictable item, such as contingency for repairs.

    There are two more points to consider under this step: whether the data is available, and whether the submitted data is complete. Even when you’ve identified a potential source, some data is not going to be available early enough to be entered into the forecast. Also, you may identify a potential source for the data, but what is submitted may not be reliable in terms of accuracy or frequency of submission.
  4. Set the forecast timeframe.
    Most companies forecast a daily cash position, but the nature of your business determines the other forecast horizons. The greater the variance of the submitted data, the more frequently you’ll want to calculate your forecasts.
  5. Select the method to create the forecast.
    This is determined by the quality of the data and the time period of the forecast. If the data is reliable, there won’t be as much need to manipulate it. When it’s less reliable or incomplete, you will need to manipulate it to some degree in order to produce a meaningful forecast. Be sure to consider any technological constraints in your decision. Although statistical modeling can be done using spreadsheets, dedicated forecasting software is generally more powerful.
  6. Daily management of the system.
    There are a number of checks which need to be made on a daily basis. These include check expected data, check any unexpected data provided, and reconcile data with external information, if possible.
  7. Identify output.
    Finally, you’ll want to review the forecast output. Cash position forecasts should give a good indication of likely balances, which is information you can rely on and share with decision-makers.




Cash Forecasting Best Practices

Since the process hasn’t been entirely automated by most companies, the process can be time-consuming and resource heavy. To help you become more nimble, we put together a list of the 10 best practices in cash forecasting.

  1. Define the Purpose of the forecast to drive the outcome.
    Cash forecasting means many different things to companies depending on their size and complexity, though the main purpose is generally liquidity management. Sit down with all involved in the process and talk about what you want out of the forecast. Discuss how much time and effort should be put into it and at what level you need to forecast. Identifying the degree of granularity management needs will help you avoid spending unnecessary time getting bogged down in details. Reach agreement on everyone’s definition of the cash forecast, acceptable output and accuracy measurements.
  2. Use appropriate detail to make the process simpler and faster.
    Understand where the numbers come from, and the processes others use to create them. Judiciously integrate technology to gather key data, exhibit financial acumen, and encourage team participation to best reflect the reality of your financial business needs.
  3. Understand the types of receipts and disbursements in terms of predictability and timing.
    To arrive at the forecast, companies look at their bank statements and determine where cash is coming from and where the outflow goes. The problem with looking at other indicators, such as percentage of sales, is that it’s too theoretical. Tag each transaction, and create a cash flow statement that runs parallel to the accounting statements.
  4. Disclose assumptions, understand actuals and dive into their history.
    In order to be better at telling a story with your data, make notes of the timelines and sources. Also, be sure you know of any large changes in the past and be able to explain them to your supervisor so they can communicate them as well.
  5. Validate and make necessary adjustments using variance analysis on a timely and consistent basis, but focus on its materiality to cash flow.
    The underlying situation will help determine the frequency of the variance analysis — weekly, monthly, quarterly or yearly — it all depends on the type of forecast data to be shared or explained. Making this determination requires an understanding of what’s important in terms of cash flow as it relates to the amount in question.
  6. Ensure usability.
    Make sure you know what the model output is used for so you can provide the correct information for users — and explain it effectively to different audiences. If strategic reasons are driving the output, then the data is likely to be higher level; if it’s more tactical in nature, a more granular explanation may be needed. In both instances, it’s best to know the data.
  7. Alight the short-term cash forecast with the long-term corporate model.
    The frequency and horizon of forecasts varies among different organizations, depending on size and needs. One example of this is aligning the annual or operating plan to the five-year strategic plan and reconciling discrepancies and assumptions. This will likely require assistance from FP&A, or other departments, for some of the inputs and assumptions.
  8. Use Statistical analysis, for example regression of historical patterns.
    The problem with looking at other indicators, such as percentage of sales, is that it’s too theoretical, according to Jeff Cappelletti, a principal with Upper Third Consulting. “By looking at historical data, you get a realistic road map of where the company was,” he said. “Only then can you look at receivables and future purchases. But you look at the past first and then look forward.”
  9. Make the forecasting process simple yet detailed, and understand your variances - dig into the actuals.
    “Practitioners need to stay in touch and abreast of business changes,” said Greg Lattanzi, CTP, senior treasury analyst at IGS Energy. To keep the forecast “honest,” treasury should do a variance analysis that looks at actual A/P, in addition to any trends that may be drivers of the business but that are not incorporated into the forecast.
  10. Don't make it a one-way street.
    Rely on business units to supply their input, but don’t forget to return the important forecast information to ensure they can make decisions that will positively impact cash flow. For example, showing them improvements to the forecast from implementing working capital improvements is one way to share and collaborate with the business unit, especially if it’s tied to incentive compensation.

The Role of Treasury in Cash Forecasting



The Role of Treasury in Cash Forecasting

Business units are supported by treasury’s insights, many of which stem from its scrutiny of cash flows in support of more efficient management of working capital. It’s also important for treasury to review bank account structures; connectivity; funding strategies, both short- and long-term; and financial risk management policy — all of which affect the department directly.

Taking a closer look at these items for review, we see that maximizing visibility of cash is central to any improvement in forecasting and can be achieved by streamlining the company’s bank account structure. Next on the list is connectivity — or access to information. Treasury should have access to as many company accounts as possible, either via an automated data feed or intracompany system, such as an ERP.

In terms of funding strategies, treasury should align cash outflows with expected inflows to minimize the amount of short-term borrowing required, wherever possible. Equally as important is an understanding of the scope of the covenants imposed by lenders, to ensure any limits are being monitored.

Finally, there’s financial risk management policy. Two items under this heading have the potential to disrupt a cash forecast: foreign currency and interest-rate exposures. That’s why an understanding of and a policy that manages them — within the company’s risk appetite — is critical.

Treasury and FP&A Working Together



Treasury and FP&A Working Together

Rolling into FP&A’s models

When it comes to longer-term forecasts, FP&A will likely build a model that translates operational budget items into a financial budget, both of which are then combined to create expected financial statements for the forecast period. What’s treasury’s role in this? To show how its understanding of cash flows, cash flow patterns and cash flow correlations can enhance the models. Taking it one step further, treasury can step in to collaborate with FP&A as they seek to uncover the reasons for any budget variances. Understanding these variances can aid in improving future forecasts and budgets.

Treasury also has an important role to play in updating any rolling budgets and forecasts. Sharing updated information, such as forecast cash positions or CP rates, can improve the accuracy of the forecast positions. That said, treasury isn’t the only source of updated data; ERP systems should also have data from the business units that can be used to inform the forecasts.

Working together, treasury and FP&A can strengthen strategic forecasting

Treasury and FP&A approach cash forecasting very differently — so just imagine what they can do when they combine forces! Let’s take a look at five areas in which their different approaches can serve to strengthen the forecast.

  1. Scenario modeling.
    Treasury’s knowledge of how individual cash flows behave under pressure is very helpful in the development of a clearer understanding of where the pressures lie in an expanding business. In turn, this knowledge enables FP&A to model the impact on cash of various potential strategies with more confidence. It also helps them identify the risks that threaten the achievement of corporate objectives.
  2. Operational enhancements.
    Treasury’s granular approach is helpful in identifying strategic operational enhancements for improving the use of working capital, such as the adoption of standardized payment processes and increased automation within workflows. And FP&A’s position in the company as a finance business partner makes it privy to early warnings of potential disruptions, which it can then share with treasury.
  3. Borrowing base.
    When it comes to borrowing, ensuring an appropriate balance between debt and equity is key. To achieve this balance, you need to understand the obligations that arise from different types of borrowing, which then helps inform models around the preferred capital structure. As it happens, this is treasury’s forte. Treasury can also help structure borrowing in such a way as to avoid unnecessary stress when servicing and repaying the debt. Where does FP&A come in? FP&A will then use the cost of capital calculation in its decision and project valuation models.
  4. Supply chain efficiencies.
    Assessment of a company’s supply chain includes customer and supplier creditworthiness and logistics, both on the procurement and the sales side. Since any problems along the chain likely has cash flow implications, insight from treasury regarding payment patterns can help the business identify and manage those risks.
  5. Risk management.
    Treasury and FP&A are both linked to risk management in pivotal ways. Treasury’s role is one of critical support for FP&A: identifying financial risk exposures and natural hedges before a strategy has been adopted. This information can provide context when evaluating the potential returns and also allow the company more scope to manage those risks if the project is pursued. FP&A’s role in risk management is one of constant assessment of uncertainty and volatility as they seek to forecast and project financials forward.

As we can now see, the role of treasury in cash forecasting is significant. And the fact that treasury and FP&A approach cash forecasting so differently actually leads to expanded benefits for the company as a whole, including more accurate forecasts over every time horizon, more understandable forecasts due to increased consistency, increased resilience as potential problems are identified in the short term, and identification of the key financial risks associated with potential projects.

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