Smart Logic in Cash Forecasting

Gerry Daly


Smarter logic in cash forecasting


Whilst today’s treasurer has a much more strategic role, the pressure to deliver on day-to-day operational activities shows no signs of slowing any time soon. A mounting pressure to deliver more with less adds even further tension. To manage these numerous and often conflicting demands, the treasury function has to be very closely integrated with the rest of the business.

One way of achieving this is by using technology to both automate repetitive operational processes, and provide better insight into the underlying drivers of change across the business. For treasury, an integrated system for providing accurate cash forecasts is a vital tool for extracting more with less. No matter whether the objective is liquidity management, maximising interest earned, capital expenditure appraisal, setting longer-term funding or investment strategies, establishing strategic objectives or maximising working capital, technology can lead to reliable and unambiguous results. In turn, the increased accuracy drives better decision-making to improve returns or minimise expenditure.


Many perspectives, one truth

Clearly set objectives should lead to a common understanding of the cash flow forecast, driving outputs and supporting infrastructure for KPIs. Unfortunately that’s not a given, as different stakeholders have different perspectives. A medium-term forecast for the CEO may mean managing external stakeholders, for the CFO the same horizon may be more about setting internal targets and bonuses, the treasurer may on the other hand be more concerned with interest rates and foreign exchange risk management.

A poorly prepared cash flow forecast can be likened to Pandora’s box, the implications of getting it wrong can be costly and time-consuming – at best. But getting it right is no easy task – even for an individual who knows the business intimately. Numerous factors are at play: people and process, late submissions, inaccurate or incomplete forecasting and the reconciliation issues of a direct (treasury) and indirect (FP&A) cash flow forecast, both built with different objectives and time frames in mind – to name a few.

Cash forecasting is a cross-functional process and should not therefore belong to just one function, as can often be the case with a top-down or bottom-up approach.

Inaccuracies in longer-term forecasts luckily won’t have an immediate impact on short-term cash management decisions and vice-versa. However, FP&A numbers are provided to the market, and any significant variances often require a detailed explanation to the CFO as quarterly, interim or year-end reporting dates approach. Valuable time gets spent analysing anomalies based on different assumptions – data for which the treasurer is unlikely to have access to. Not a good place to be at the busiest time of the year.


Getting unstuck

“We do it this way because we always have.”

Insanity has been defined by doing the same thing over and over and expecting different results. A stagnant process of compiling a forecast in a dynamic environment simply cannot feasibly drive any improvement in accuracy or delivery. Legacy forecasting processes in most corporates are cumbersome and laborious. In a typical scenario, an operating unit will compile a forecast in Excel and submit it for consolidation to central treasury. They in turn will then pour over incomplete forecasts chasing up late submissions, or painstakingly aggregating data.

Although companies usually are open and looking for improvements, these are more often than not impeded by the ‘achieve more for less’ mindset. Consequentially, they are often sought through spending more time and effort on the process with marginal (and generally unscalable) results.

, which integrate different systems and data sources that are used in the process. An important caveat needs to be made that past performance is no guarantee of future results but, when it comes to cash forecasting, the predictive power of past behaviour is a compelling starting point when enhanced by data analytics and artificial intelligence, both of which increase forecast accuracy and timespan. The organisation’s financial systems have all of the data at hand but it is not always available to those responsible for forecasting. That in itself seems absurd as cloud-based ERPs and single instances are more the norm than the outlier.


An intelligent solution

A simple solution to these common cash forecasting problems is to provide one source of truth which integrates with the operational cash flows of the business maintained within the financial systems, treasury flows within the treasury systems, and banking platforms with peripheral sources of data (Excel or data warehouses). Enhanced with predictive analytics and artificial intelligence, an integrated system can provide both the treasury and finance departments with a more accurate, efficient cash forecast from a single source of truth.

As an example, Cashforce’s ‘buffer-algorithm’ will back-test its current cash flow forecasting model and re-apply these results onto the current model. In addition to the application of smart logic, such as customer and vendor payment behaviour, this will result in much more accurate forecasts. By including a feedback loop into the forecast algorithm, Cashforce is able to accurately predict customer payment behaviour, unexpected invoices, growth, seasonality and even payment behaviour of suppliers.

Several methodologies for more complex AI-driven forecasts also exist – ranging from basic methods such as time-series to more complex concepts such as deep-learning and neural networks – all of which provide unparalleled insight into the drivers of cash flow and working capital movements.

Not only will AI help with the processing of data and cost reduction, but by expanding the business department with the creation of brand new technical and analytical positions, AI becomes as important as the human viewpoint in the future of financial decision-making.

A single integrated solution should lead to actionable decisions and cost reduction while also becoming a strategic linchpin in the organisation, helping treasury and finance departments quickly obtain and present a single and accurate version of the truth. By implementing AI solutions such as Cashforce, companies gain better insights into their cash forecasting and working capital and have the potential to unlock more cash than ever.


Now to the opportunity…

That the role of the treasurer has evolved to be more strategic is a huge opportunity — both for professionals and the organisations they work for, but many still struggle with the time and practical pressures that will allow them to grasp all the available opportunities. But now, by deploying AI and successfully mining data for better results, the limitations begin to fall away.

Now, Treasury/CFO/FP&A not only know what has been, what will be and especially why that will be the case, but they are also equipped to make informed, intelligent decisions with a previously unforeseen level of confidence.

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