In simple terms, liquidity is the amount of cash you have available to pay the bills.
In order to be prepared, organisations of all sizes must have a thorough insight of payment obligations and expected incoming cash flows to ensure they have the correct amount of money to handle current and future payment transactions. To achieve this, we need accurate and reliable cash flow forecasting.
Problems In Forecasting Incoming And Outgoing Payments
It is usually easier to forecast outgoing items than incoming cash flows. Every company has its individual obligations, but it is more difficult to predict how others take care of theirs. How many of your customers pay their bills on the assigned day? Especially in B2B businesses, the accumulated knowledge of the customer’s payment behaviour should be utilised as much as possible. This can provide a much more accurate forecast of how the cash situation will develop.
On occasion, outgoing payments too can prove difficult to predict. Is your invoicing process efficient? Can you access all the necessary information around upcoming investments?
Another common challenge in forecasting for liquidity is that the information has to be sourced from very different systems. Do all your divisions or subsidiaries use the same tools? Chances are, they don’t.
How To Collect The Data You Need
You benefit from the best possible view of your liquidity by combining both hard data, from various systems, and soft data from the experiences of your business stakeholders and financial staff.
Usually the hard data from a company’s ledger and invoice processing systems are enough to provide visibility for approximately two weeks. This kind of data collection for the forecast isn’t difficult. The trick is to do it as efficiently and consistently as possible, otherwise you run the risk of gathering the data haphazardly or too late, or both. Automating at least the bulk of data gathering and processing will give you a timely and traceable result.
Choose The Best Tools Of The Trade
Spreadsheet software is not efficient in liquidity forecasting. The manual compilation of data is very time-consuming. Therefore, high-quality, continuous and up-to-date cash forecasting relies heavily on automation.
The best cash management solutions save your company time and money in automatically collating data from different systems. They are easily introduced and don’t strain those who need to give the system the necessary data.
The cash management system you choose should also help in analysing the forecast’s accuracy and variance. This way your company can keep on improving the quality of the forecast and stop losing money on idle cash. The time you save with automation can be used on adding value elsewhere in your business.
Director, International Business
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