How can treasury deploy a successful cash flow forecasting project?

Mo Aziz by shutterstock.jpg an aerial view of a bridge

Cash forecasting - how to turn a vicious circle into a virtuous circle

We at Analyste have worked with treasuries for decades and find that tackling the “cash forecasting challenge” is still a relevant issue for almost all of the treasurers we meet. Let's take a closer look at one of the classic problems most treasurers face. 

We all know that the concept of cash flow forecasting is quite simple: you collect all possible information about cash going out and cash coming in from the people who are responsible for managing those cash flows. As a result you get a reliable picture of your company’s liquidity. This works in theory. But in practise, difficulties start to emerge when the business units are not capable of providing accurate and timely forecasts. Sounds familiar, doesn’t it.

But is this really true? When we take a closer look at the problem, it seems that people in the business units are usually quite aware of money coming in and going out. Of course, it can be challenging to know when a client is going to pay an invoice, but in most cases, the person responsible for the accounts receivable still has a pretty good estimation, i.e. a forecast. What’s the problem, then?

Does everyone know what to do? And why?

The source of the “cash forecasting challenge” is more often found in the co-operation between treasury and the business units. A lack of clear instructions and simple tools to perform day to day estimations are often the real deal-breakers. Do all the key people in your organisation understand the importance of financial risk management and cash flow forecasting?

Any system, no matter how sophisticated it is, can not automatically estimate when your client will make the payment. Even if you are lucky enough to have a fully integrated system that can pull data from a fragmented ERP environment, cash forecasting still requires a human touch.

Don’t build systems, build bridges

To get this vital information from the business units, you need the right tools. But you also need proper co-operation between people. Thus considering a cash forecasting project only as a systems project, is set up for failure. Don’t tie your IT department to a long and costly task if there is a risk that the business units can’t or won’t use the new system. Start your project instead by building a bridge between the business units and treasury.

The most efficient way to fail with a cash forecasting project is to overlook

the importance of working closely with the business units.

Business units need to understand why their timely data and knowledge of client behavior is so important in cash flow forecasting. And treasury needs to understand why business units act the way they do, and how they can be helped with improving accuracy on forecasting.

Building a strong partnership requires understanding each other, clear instructions and support. And like in all partnerships, co-operation must be mutually beneficial. Otherwise you’ll have a hard time getting a buy-in from your management as well as getting the business units to work together with you.

Be ready to:

  1. Take time to learn the needs of the business units. How could the treasury help them?
  2. Explain the treasury’s needs in a way that makes sense to the business units. Skip the jargon! Your key partners are often cashiers or accountants who usually don't have expertise or know-how in treasury issues. And they already have a lot on their plate without your project. Explain why their contribution is important.
  3. Choose an easy-to-use tool and write clear instructions, preferably together with the business units. And give support in deploying them, whenever needed.
  4. Give feedback to the business units on the results of their forecasts. Concrete results are the best motivator!

chart 1, virtuous circle of cash flow forecasting process

The virtuous circle of cash forecasting

Deploying cash forecasting doesn’t have to be a time consuming and expensive systems project. Choose the right SaaS solution that can be ramped up and ready to go in a matter of weeks. This way, you can focus on the internal bridge-building and leave out stressful software projects and time consuming manual processes.

To get your newly built bridge between the treasury and the business units to work the business, units need to be able to report cash forecasts easily, and you should provide them with both the instructions and the tools to make it as easy for them to work with you as possible.

Anna-Lisa Natchev, Head of Sales and Marketing & Timo Hämäläinen, CFO

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