Having a robust cash forecasting model can be great addition to treasury’s toolbox in managing liquidity and mitigating risk. However, there continues to be a debate between the pursuits for higher accuracy and the value of return on investing in such projects. Different companies are setting realistic priorities based on their own strategic short vs. long-term goals, and their level of forecasting tolerance.
This was one topic of discussion at a recent NeuGroup Global Cash and Banking Group meeting, where one member presented an overview of her company’s process for global cash forecasting and building a model with both historic and live data. Here are a few of the highlights of the presentation:
Old and new. One takeaway was that combining new and old tools, with a dab of Rube Goldberg in-house experimenting, can help. Because automation has not completely solved the age-old challenge of the collection and analysis of cash forecasting data, spreadsheets still dominate. Instead of relying on the functionality within an ERP or treasury management system, many members have taken the project of cash forecasting into their own hands and are developing in-house models specific to their company needs.
Seeking the right method. Improved accuracy in cash forecasting continues to be a top priority for members as they further analyze the various drivers of cash inflows and outflows to see what forecasting method would be the most accurate. But that method is elusive and members continue to seek either a simple average using historical data or something more complex that might include a type of statistical algorithm. The presenting member described her company’s process of engaging an external economist to help improve forecasting accuracy and come up with that method.
Resource management. For members with fewer human and technology resources on hand to invest in drilling down into the lowest level of cash forecasting details, some members find that their goals and priorities have to be adjusted to reflect a more pragmatic approach such as implementing more efficient cash pooling infrastructure and working with tax department and business entities to meet short term liquidity needs.