Improving cash forecasting by tracking actuals

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Reliable cash forecasting requires continuous and evolving development of the forecasting process. One key ingredient to this vital process is tracking the actual-accuracy of the forecast.

Actual-tracking enables you to quickly identify potential challenge areas and focus on addressing these areas before they become problematic. These areas of challenge can include; poor quality subsidiary forecasts or persistent late payments from specific groups of customers.  

If subsidiaries do not consider cash forecasting a critical process, this could mean trouble on the horizon

Ensure reporting subsidiaries understand the importance of cash forecasting 

The purpose of tracking actuals is to improve the reliability of your forecast. You need to ensure that all business units submitting forecasts have sufficient working instructions that also include a motivational piece. It is up to you to describe, in no uncertain terms, why reliable cash forecasting is essential and necessary for the company. Only when subsidiaries understand the consequence of poor reporting, can they contribute to its success with accurate reporting. 

Long-term  cash forecasts 

When tracking the actuals of long-term cash forecasts, the fundamental purpose is to measure how accurately subsidiaries can forecast their income and expense flows during more extended periods. Depending on your type of business, the typical period is between 12 and 36 months. 

The more reliable picture you have of your company’s long-term cash flows, the better you can optimize the balance sheet and lower funding costs.  If the long-term forecasts you are receiving are unreliable, remember to instruct your reporting units to also update their latest budgets and forecasts to the cash forecast. 

Short-term cash forecasts 

When tracking the actuals of short-term cash forecasts, the key point is to monitor how well reporting units can forecast the actualization of their forecasts. The more accurate a picture you have of your daily cash flows, the more effective your liquidity management.  

Short-term forecasts can be improved by, e.g. taking into account, typical payment practices and patterns for incoming and outgoing payments and also considering overdue invoices within the forecast. 

Actuals-tracking across different organizational levels 

The primary interest of the HQ or the treasury is to follow the accuracy of the overall forecasts of reporting units. When tracking at the long-term forecasts, it is useful to use a so-called ‘waterfall model’ to see how the total of the forecasts changes over time.

In addition to understanding the importance of cash forecasting, reporting units need to have access to proper forecasting tools. The quality of the forecasts, from your subsidiaries, will be vastly improved if the groups can track the accuracy of their forecasts at a detailed level.

Because of this, it is crucial that your forecasting solution enables actuals-monitoring on a per-transaction basis. The easiest way to build this detailed tracking is to import actual cash flows to the forecasts from your AP and AR systems. By utilizing the invoice IDs from the AP/AR, you can link actual cash flows with forecasted cash flows, easily & accurately. 

Stick and carrot 

To get the process started, you need to ensure all parties, involved in cash forecasting, know that the accuracy of the forecasts will be carefully monitored. You should provide regular feedback on the quality of the forecasts to motivate reporting units to develop and take ownership of their forecasting efforts. 

This motivational element can be managed with either a stick or a carrot! The stick often involves various public ‘shame lists’ that unsuccessful forecasters want to avoid by improving their results. 

As with most motivational situations, the carrot approach usually works far better. Public lists of fame, naming the best forecasters, combined with personal feedback, often prove more effective. Some companies have gone so far as to tie a part of the subsidiary bonuses to the accuracy of their cash forecasts. 

Are you interested in learning more about how to get your cash forecasting on a new and improved track? 

Contact us! 

My name is Timo Hämäläinen and I am the CFO of Analyste Oy. I have worked with the challenges of cash forecasting for the past 25+ years.

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