Effective Cash Forecasting Yields
Greater Returns, Survey Says
It pays to forecast cash.
According to a survey of 362 companies conducted by Chicago-based consulting firm Treasury Strategies, investors who execute an effective cash forecasting program gain 30 basis points of added portfolio return over their industry peers who don’t.
“We’re finally able to put forward an objective measure of the tangible benefits of cash forecasting, although this average figure will vary based on a company’s situation,” says David Robertson, a Treasury Strategies Partner.
Why so little forecasting?
The study found that only 50% of responding firms use formalized forecasting models or processes. The reasons why varied from the unreliability and irregularity of incoming data to costs, lack of time to devote to forecasting, and not having a clean account structure with banks.
“Data are critical to effective cash forecasting,” Mr. Robertson says, “and these information flows aren’t always set up properly.”
For example, if you look at a company that has both customer relationship management (CRM) and enterprise resource planning (ERP) systems, information may appear coordinated. But the reality is each subsidiary/department may not report all their information, which would render forecasting inaccurate.
The survey also reveals that at some companies cash forecasting programs are undisciplined and don’t always comply with established policies.
Establish forecasting processes
Companies can look to their financial services providers for help in improving cash forecasting and ensuring strong financial controls and processes.
“Banks can help companies set up appropriate account structures, deliver information and leverage their position as the settlement gatekeeper to help companies comply with policies and perform within the risk parameters of their portfolios,” Mr. Robertson says.
He suggests that CFOs or controllers document how the forecast process works, list sources of incoming data, and regularly communicate to colleagues the importance of forecasting on the company’s bottom line.
“Effective cash forecasting is particularly important at a time when interest rates are expected to rise,” Mr. Robertson says. “Having a more dynamic forecast will help companies better understand and ensure their cash positions.”
Contact our Cash Management team at (312) 442-5070 to learn how ColeTaylor Reporter, our online banking system, can provide the transaction information you need to support effective cash forecasting.
“Having a more dynamic forecast will help companies better understand and ensure their cash positions.”
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