Forecasting the Future: Why Treasury Needs to Work Smarter Than Ever

Have you ever worked a job where your official goals and your bonus metrics didn’t align? If your bonus incented you to behave in a manner that was opposed to the goals set for your department, you probably followed your wallet. I find that companies often have the same problem with their cash forecasts: the forecasting methodology does not properly align with the desired purpose for the forecast.

Leveraged companies that make regular debt decisions often feel the most pressure to forecast and to do so accurately. But the methodologies chosen by many of these companies are often mismatched to the desired use of the forecast. Still, cash is king. In the wake of the financial crisis, being able to clearly show that you can meet your daily liquidity obligations, both now and in the future, is still important.

It is hard to forecast accurately AND efficiently without clear guidelines:

  • Do you need a daily forecast that enables you to give notice to your bank to drawdown term loans that will meet your weekly needs?
  • Is your company nearly maxed out on its credit lines?
  • Do you often end up borrowing on your swing line at the last minute? If so, are you forecasting to the right degree of accuracy to make the appropriate borrowing decision?

Perhaps daily forecasting is overkill, and your needs can be met by a monthly or quarterly forecast to answer the ubiquitous treasury question—you know the one, where do we look for quarter ending cash? The key to successful cash forecasting is matching the accuracy, and the degree to which the underlying forecasting is needed.

The task of building a forecast can seem overwhelming, mostly because of the sheer volume of possible data that can be used to build it. Start simply and then refine the forecast. If your business is somewhat cyclical or has regular recurring billing and receivable cycles, it could be that using averages based on past numbers is more than close enough to forecast out the next quarter of receivables by day. Why build a sophisticated model built on imports and data collected from a variety of sources if a simple average will do?

Pick your two or three most impactful (highest dollar) categories of inflows and outflows and focus on them. Are they recurring or highly variable? Is the timing predictable or fairly random?  If past history isn’t indicative of future patterns, is there another good source of the data? If you start with this approach and slowly add on more and more categories, you can end up with a robust or healthy forecast.

Remember that a good forecast can impact just about every area of treasury. Not only will you make better debt decisions (and avoid that emergency swing line), but you can initiate (or make better) intercompany loans using the domestic and foreign currency cash that you already have more efficiently and reduce transaction costs. You might drive better working capital management by influencing accounts payable or receivable policies based on your cash flow predictions. Treasury is typically the best place for the creation of a true “cash” forecast based on real dollars at the bank, not accruals. So don’t delay; work on building an accurate forecast now, before rising interest rates and tighter credit make it an imperative, not just a “nice to have.”