It is difficult to overstate the advantages of cash flow forecasting, as forecasts are an integral piece of the cash management puzzle. Cash forecasts allow businesses to better understand their cash flows and prepare for potential problem areas.
Having an effective forecasting process can be crucial to the success of a business. As CFO.com explains, "In times of uncertainty, the capability of an organization to navigate through significant instability can be the catalyst for long-term financial health. A cash-flow forecast model serves as an early warning sign to a company’s future business health by putting a forensic lens on cash balances under a variety of future circumstances."
Cash forecasting has never played a more important role in the fiscal health of a business. With the impacts of COVID-19 and recent economic uncertainty, many businesses are operating with little margin for error. Having an accurate cash forecast will allow businesses to anticipate potential cash gaps and avoid missed payments. Forecasts provide businesses with the foresight to implement corrective action like fine tuning payment and collection strategies, liquidating assets or reaching out to lenders. In addition to helping to mitigate the impact of a cash shortage, forecasts can help predict a surplus.
“This is a similar exercise to minimising the cost of funds; knowing that a surplus will occur in advance enables the cash manager to look for the most effective ways to invest funds.” -Treasurers.org
Businesses rarely benefit from having lots of stagnant cash on hand. Forecasts can help identify a potential surplus and allow cash managers to allocate excess cash efficiently. Whether businesses decide to invest, or use excess cash to create a competitive advantage, it is crucial that businesses leverage forecasts and put surplus cash to work. As businesses look to allocate excess cash, scenario planning can help forecast the impact of specific investments or decisions.
"Scenarios are a powerful tool in the strategist’s armory. They are particularly useful in developing strategies to navigate the kinds of extreme events we have recently seen in the world economy. Scenarios enable the strategist to steer a course between the false certainty of a single forecast and the confused paralysis that often strike in troubled times." -McKinsey & Company
Scenario planning becomes especially useful in the case of automated cash forecasting. Often businesses do not have the personnel or resources to create tailored forecasts. Apps like Trovata utilize API connections to automate the data collection and tedious manual workflows associated with scenario planning. These carefully crafted forecasts can be used to prepare for everything from supply chain disruptions to managing an enterprise's cash and liquidity. The ability to quickly design and generate these targeted forecasts allows businesses to project the impact of decisions and potential value of investments before they are made. Scenario planning can be used to answer all of your team’s “what if'' questions. Will we be able to pay creditors and employees? What are our operational expenses? How can we optimize our use of cash?
When it comes to managing and mitigating the risk associated with foreign currency, having a reliable forecasting process is key. Forecasts allow cash managers and treasurers to anticipate cash needs and reduce the need for foreign currency transactions.
According to Treasurers.org, "It is the cash manager’s basic job to provide the company with sufficient liquidity to enable the operating units to function. When assessing potential surpluses and deficits of cash it is necessary not only to assess amounts and currencies, but also the periods for which the surpluses or shortages will arise. Some companies build in a cushion into their calculations in case of unexpected cash calls." Forecasts help businesses better understand their exposures and create a plan for mitigating FX risk.
While creating or improving a cash forecasting process may seem overwhelming, Trovata makes it simple. As an automated cash management platform, Trovata uses machine learning and AI technology to eliminate many of the manual aspects of cash forecasting.
Trovata.io directly integrates with banks and allows its users to connect to their banks in minutes. With Trovata, cash positioning is fully automated and users gain access to built-in business intelligence tools to visualize, analyze, report, and reconcile cash flows.
Unlike other providers in the space, Trovata.io can be installed in a minimum of a few hours. Contrary to legacy TMS, Trovata.io offers affordable set-up and maintenance fees.
To learn more about Trovata's forecasting solution, visit Trovata.io.