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Treasury Management

A Handle on Process Leads to Better Cash Forecasts

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March 08, 2018

Partnering with business units and others to master the cash-flow process can lead to improved forecasts

financial system softwareCash is the reason for the treasury function, yet one challenge treasurers always struggle to overcome is knowing how much to have. One facet that can help determine this number is quality cash-flow forecasting.

However, forecasting can be a treasurer’s nemesis; it has been a perennial issue for treasurers and discussed at NeuGroup peer group meetings seemingly forever. One takeaway from a recent gathering of practitioners was that cash-flow processes result in a reasonable forecast. For instance, in a pre-meeting survey for the Assistant Treasurers’ Group of Thirty (AT30), 83 percent of respondents reported that they have a process in place to effectively capture cash-flow needs. However, all agree, there is always room for improvement with the these processes, most of which are manual.

One suggestion: communicate better with the business units. That is, direct and consistent communication with business units becomes critical when going for an accurate forecast. One member at the AT30 meeting shared with members his struggle to prepare a cash-flow forecast when the business had changed in the wake of the launch of several successful products (a good problem).

This member said that when business fluctuates and historical data is undependable, it is important to reach out to the business units for clarity. And since many members also depend on the FP&A group to prepare the forecast, it is important to partner with that group to better understand the data. This is especially important because as most treasurers know, cash-flow forecasting can be more art than science. So, practitioners are making decisions based upon incomplete, or often conflicting data, and thus they need to gather as much information from others as possible.

One member suggested variance analysis, which can help with fine-tuning the forecast. Some questions to include in your analysis:

  • Is the top-down forecast in sync with the bottom-up?
  • What is your tolerance for difference?
    • Establish a materiality threshold either by percentage or dollar amount.
  • What is the cause for the differences?
    • Business assumptions
    • Timing
    • Did not forecast

An accurate forecast is usually within reach for treasurers; it just that that the process to get there can be manual, which means time-consuming. Many members of the AT30 still rely on Excel spreadsheets to aggregate data, which can be a drawback, but good communication with the FP&A group that presents the forecast to the business units is essential to make the forecasts as accurate as possible.

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