Five Dangers That Bad Cash Forecasts Pose for CFOs

By Erik Bratt February 8, 2018

Proper cash management and forecasting is vital to any organizations for a number of key reasons, including effective liquidity and risk management. Most treasurers understand the importance of timely and accurate cash forecasting — even if they are not always able to get them — but do their CFOs? Many senior financial executives accept cash management and forecasting provided by treasury at face value. However, here are five consequences of not being deeply engaged on ensuring accurate cash forecasts on a global basis for CFOs.

1. Making bad business decisions that affect business performance

Having a clear view of the company’s true cash position is essential when it comes to making business decisions, from day-to-day changes in staffing levels to long-term commitments like dividend policy and stock buy-back plans. Speed is of the essence – and the sooner the CFO has visibility into the company’s true cash position, the faster they can begin executing their plans. Conversely, problems can arise when that insight is delayed: if the CFO does not fully understand the business performance, or if the cash flow forecast is based on old information, they may lose important time to execute their plans. Untimely data can therefore have an adverse effect on performance.

Additional reading: The Six Key Areas where CFOs Fail to Deliver for the Board of Directors

2. Failing to manage financial risk effectively and transparently

Managing financial risk is a major concern for CFOs. A company’s FX hedging strategy can have a positive impact on the bottom line – but equally, there is a risk that the company’s hedging decisions could result in a negative impact. CFOs therefore need easy access to the relevant data so that they can manage financial risks as effectively and transparently as possible. Clear and accurate data also gives CFOs the tools they need to explain the rationale for their hedging decisions to their peers and to the board and gain the necessary buy-in. Finally, it enables them to report back about how effective the company’s hedging strategy has been.

3. Incurring higher funding costs than necessary

Cash positioning and cash flow forecasting play an essential role in determining the company’s current and future funding needs, which is crucial given the CFO’s role in overseeing the company’s capital structure. Arranging access to too little credit can be dangerous – but equally, arranging a larger line of credit than the company actually needs can result in higher costs than necessary, even if that line of credit is never used. With a clear view of current cash balances and future cash flows, CFOs are better placed to limit their need for external funding and thereby reduce their funding costs.

4. Delaying investment opportunities due to a lack of confidence

Issues can arise if the cash flow forecast does not have a good track record where accuracy is concerned, as this can hinder the company’s investment plans. For example, the CFO and CEO may wish to invest in an opportunity such as a talent development project – but in order to pay for the project, the company may briefly need to access a line of credit, which will then be repaid once the company has received a payment due from a customer next month. If the cash flow forecast has a track record of being accurate, the CFO may get the go-ahead to make the investment. But if confidence in the cash flow forecast is lacking, the CEO may need to delay these plans.

5. Poor operational efficiency

Finally, a lack of clear visibility into the company’s cash position can hinder the CFO’s ability to monitor how well specific operational initiatives are progressing. For example, the company may have decided that one of its operations needs to downsize. As a result, the size of the payroll is expected to decrease from $5 million to $3.5 million over a defined period. With clear visibility, the CFO should be able to monitor whether or not the project is on track – but without sufficient visibility, the CFO may lack insight into the speed of execution and may miss the opportunity to intervene on a timely basis.

CFOs and treasurers can gain real-time cash forecasting through a cloud-based treasury management system (TMS). These systems make it possible to get global cash visibility, as well as advanced forecasting so CFOs and their teams can increase agility and maximize decision making. 


Five Dangers That Bad Cash Forecasts Pose for CFOs

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