Cash Forecasting Workarounds: Why You Lose When You Hoard Cash

Many treasurers have been stockpiling cash instead of putting together accurate liquidity plans. What seemed to be a good workaround, doesn´t work in today´s turbulent markets. Let´s review why you should not hoard cash, but do proper cash forecasting:

1. Cash piles up quickly under the radar
Usually, finance professionals hold more cash than needed, because they don´t know exactly how much cash they have and how much they will need in the future across the enterprise. Most likely, cash hoarders are sitting on a lot more cash than they realize, and here´s why: If corporate treasurers have a cash hoarding mentality, their regional cash managers most probably will as well. The lack of visibility into global bank accounts often leads to excessive cash reserves not only in the corporate accounts but also in every single subsidiary.
Prudent cash forecasters have visibility into short- and long-term cash positions. Thus, they can reduce cash reserves to a minimum. As they do not only oversee corporate accounts, but also local accounts, they can bring down the cash levels in subsidiaries and avoid trapped cash at the same time.

2. Idle cash costs you interest twice
In today´s low interest rate environment, cash hoarders get close to zero interest earnings on their idle cash. They might even lose money without realizing, as banks try to pass on the negative interest rates they are paying. Additionally, cash hoarders often miss the opportunity to pay down debt.
Cash forecasters have an overview on current and future cash needs. They can put surplus cash to work in many ways. They might look into investing idle cash over-night, shifting from short term to longer term investments or increasing investment volumes to get better yield. On the liability side, they will be able to eliminate overdraft facilities and pay down debt.

3. Cash mountains are risky
The higher the cash reserves, the higher the risks. And without knowing it, cash hoarders might expose their companies to risk levels outside their organizations’ risk appetite. Look at it like this: The more money you have concentrated in one place, the harder you will be hit by an unfavorable shift in FX curves, for example, or a counterparty default or a political crisis. As cash hoarding is caused by lack of visibility, chances are high you are also over- or under-hedging, not knowing all risk factors and risk correlations.
Cash forecasting helps to reduce liquidity, FX, counterparty and country risk, by making cash flows in different currencies, bank relationships and business unit operations transparent. This visibility into global cash flows provides a solid basis for holistic risk management and efficient hedge accounting programs.

Recent volatility in FX and interest rates and regulatory changes in the banking environment, as well as uncertainty in emerging and developed markets, are making cash hoarding unbearable. Only effective cash forecasting enables treasurers to efficiently manage a global organization´s cash and risk positions. If you want to get started with cash forecasting or improve your liquidity plans, take a look at our eBook "How to Build an Accurate Cash Forecast".