Before we discuss common mistakes in cash flow forecasting, we should briefly explain what forecasting is and why it is important. Cash flow forecasting is a reporting technique used to predict future cash flows. Forecasting is used to identify potential problem areas and mitigate risk. Cash flow forecasting is a highly manual and time consuming process. Even worse, the forecasts are rarely accurate.
A recent study done by KPMG found that when it came to cash forecasting, “Just a tiny fraction (one percent) were exactly on prediction within the last three years, and the most accurate in the group - those that have come within five percent of forecasts - make up only about one in five.”
Cash forecasting is an integral part of the cash management equation. But, if we all know the importance of forecasts, then how is it that we keep getting them so wrong?
Cash forecasts are notorious for being vacuums of time and sanity. As a result, many organizations underinvest in the forecasting process. Whether this mistake is made to divert funds to other projects, save time, or to avoid the process altogether, it can be a costly error. As KPMG states, “Despite the demonstrable benefits of reliable forecasting... Many organizations continue to struggle with, and even neglect, this business critical process. Too often, rather than treating forecasting as a core business capability, managers see it as a responsibility of the finance function, tied to a timetable and with little relevance to the business cycle.” There is a simple way to avoid this mistake, provide cash managers the resources necessary to forecast. Not only will an accurate forecast help a business better manage their cash, it is a great resource for investors.
According to PWC, “cash flow forecasting is still one of the most manually intensive reports used by treasury.” When your world revolves around spreadsheets, you are bound to slip up from time to time. The highly manual aspect of Excel leaves it vulnerable to human error. It is far too easy to accidentally misenter a number or copy and paste the wrong formula. Beyond the spreadsheet, the data used to generate these forecasts is pulled from several different sources. Trying to juggle data from banks, ERPs and spreadsheets can be overwhelming, and make it easy for data to slip between the cracks.
Wrangling data for a cash forecast can be an exhausting process. This data generally comes from several inputs and collecting it can be very time consuming. By the time you finally get all of the data together and standardize it, it could be out of date. This lag between real time data, and its aggregation and normalization is called the visibility gap. This blind spot in cash management can leave a business exposed to overdraft fees and bounced checks, and over time, lead a business to failure.
Things don't always go as planned. Sometimes your clients pay late, or do not pay at all. Take the time to collect and analyze sales data. Truly understanding sales and payment cycles in your industry will enable you to more accurately predict when payments will come through. The better you understand your clients and payment cycles, the more accurate you can make your forecast.
This does not just apply to payments. How often does a project actually finish exactly on time? Sometimes that six month TMS integration ends up taking a year. On their blog, QuickBooksexplains how to incorporate a potential project delay into a forecast. “There are several factors that can delay a campaign from ending as planned, and many companies fail to take into account delays in campaigns that could impact the following financial year’s numbers. For example, if a planned project is supposed to end in October, a conservative approach would be to expect the project to be delayed up till the following year so you can factor in additional time to account for overheads that still have to be paid in these circumstances.”
At this point you are probably ready for a silver bullet to cut through the mess of manual cash forecasting. Luckily, the mistakes associated with TMS and spreadsheets are not your only option.
“There’s another way. Organisations are shifting to forecasting processes that involve people working symbiotically with data-fuelled, predictive algorithms. It’s all made possible by new technologies − advanced analytics platforms, in-memory computing, and artificial intelligence (AI) tools, including machine learning. These techniques and algorithms enable businesses to use more data (internal and external) than was historically possible.” -Deloitte
You could put in measures to mitigate risk and limit mistakes in forecasting, OR you could solve them all with a low lift and low cost solution: Trovata.
With Trovata the forecasting process is fully automated. Through the use of open banking APIs, your business’s cash position is updated in real-time and is visible on your dashboard. Trovata generates custom cash forecasts that can be complemented by data from an ERP or Excel. Machine learning algorithms are leveraged to analyze and integrate historical data trends into the reports, increasing their accuracy. Trovata saves time, improves accuracy, and allows you to focus on what really matters: report analysis and strategic planning.
Take the first step in upgrading your cash management capabilities.