Cash flow forecasting is one of the fundamental foundations of treasury. More than 70 percent of treasury executives are involved in cash position reporting and forecasting – more than any other activity – and it takes up half of their time1.
With such a huge amount of time being spent on forecasting, it would make sense that it would be an area in which treasurers have the most confidence. That’s not the case. Forty three percent of treasurers see lack of visibility into both current and forecast cash position as one of their three biggest risk factors, second only to FX fluctuations.
So, why the lack of confidence? Inaccurate forecasts are endemic. During a webinar we conducted with Deloitte, we surveyed treasury professionals to see how accurate they believed their cash forecasts to be. Although the results are neither scientific nor quantifiable, the information that it produces still presents some alarming trends. When asked “how accurate is your cash flow forecast?” the response breakdown was:
- Highly accurate (almost no variance): 0%
- Accurate (some variance, but not significant): 32%
- Somewhat accurate (some significant variances): 53%
- Very inaccurate (major variances): 8%
- Variances aren’t analyzed: 8%
Not a single respondent believes that their cash flow forecast is very accurate, and slightly less than a third see their cash flow as accurate. Six in 10 treasurers think that their cash flow forecast has either “significant” or “major” inaccuracies. The consequences of this lack of accuracy can’t be overly emphasized, and can cause a company to require a lock up huge reserves of cash. When many millions or billions of dollars are at stake, this lack of cash visibility can have a dramatic impact on how much “idle” cash an organization is forced to have on hand, to cover for unknown cash needs. The knock-on effect from this is that a company’s cash can’t be used optimally – paying down debt or funding growth or M&A initiatives , for example.
There are, of course, several reasons why cash forecasts are inaccurate, both from a process perspective and a visibility perspective. According to the respondents of our survey the breakdown for this lack of visibility is:
- Don’t have visibility into all forecast data inputs: 65%
- Lack of communication with other stakeholders: 20%
- Don’t have time / resources: 10%
- Other: 6%
Almost two-thirds of respondents believe that the lack of visibility is their biggest challenge, be it a lack of understanding as to where to source the data required for an accurate cash forecast, the use of outdated technology that lacks the necessary levels of control and visibility, or the inability to monitor and manage the complete cash management process.
A further one in five do not get timely or accurate data from other stakeholders, for example sales and other business unit heads, which again means that their forecast is based on either outdated, incorrect of simply a lack of correct information. (Obviously the eight percent of respondents who fail to do any type of variance analysis are also likely to have inaccurate forecasts, although they maybe just don’t realize how much of a problem they have!)
While the specifics reasons behind an inaccurate forecast are plentiful, and will vary from company to company, in order for a cash forecast to be optimized, up-to-date information is essential. Treasury teams must also:
- Overcome the challenge of change
- Increase source data accuracy
- Eliminate data errors and omissions
- Accommodate the overall organization
- Perform variance analysis
If you would like to uncrease the accuracy of your cash flow forecasts, Kyriba has developed a white paper, entitled Short-Term Cash Forecasting – Best Practices and Pitfalls to Avoid, which expands upon many of the challenges outlined above. You can also read more about the survey here.
1. Kyriba / Association of Corporate Treasurers 2014 survey