From the May Special Report issue of Treasury & Risk magazine

Accurate Forecasting: It’s the Discipline that Matters

Many treasurers struggle to predict their companies’ future cash flows with accuracy, leaving room for improvement in this area. However, successful companies know that cash forecasting is crucial for funding day-to-day operations and meeting long-term investment objectives. In today’s economic and regulatory environment, it’s even more critical – for cash-rich companies as well as cash-poor. While technology can help to streamline the cash flow forecasting process, it is more important to have the right disciplines and processes in place.

While no forecast will ever be 100% accurate, it’s important that the information included in the forecasting model is accurate, consistent and relevant. To achieve that, consider the following practices to help drive better forecasting results:

1. Keep an eye on the big picture

Knowing the company’s strategic direction is essential. Understanding its operating companies — what is produced and sold — as well as details such as upcoming capital expenditures, tax payments and pension payments are all key components to include in a forecasting model. However, even if a model can accurately predict the company’s receivables and purchasing figures, a forecast will mean nothing if the treasurer doesn’t know that a $75 million acquisition is planned in two weeks’ time. Ongoing communication with the entire forecasting team is critical for achieving the right level of detail to include in the forecast so that it can be easily understood and communicated to senior management.

2. Know the company’s infrastructure

A company’s infrastructure, whether centralized or dispersed widely, can vary the approach to forecasting. Additionally, the company’s internal and external systems and overall account structure will impact the cash flow forecasting exercise. For a company with an enterprise resource planning (ERP) system, the IT department will play a key role in extracting the necessary data and feeding it into the forecast. For a company with a decentralized account structure, the focus will be on collecting data from the right people around the world and entering it into a central repository, whether that is done using a treasury management system, a shared document software or through a shared drive spreadsheet.

3. Integrate systems and technology platforms

Growth is often driven by acquisition — particularly international growth. And while ERP capabilities help centralize information, acquisitions initially cause disparities as they involve a variety of local banks and a host of different platforms. Therefore, it’s important to quickly integrate new acquisitions into enterprise systems and platforms. Having a comprehensive checklist available prior to closing on a merger and/or acquisition can streamline processes and improve information flows and visibility. Additionally, treasurers should obtain access to all bank accounts, and then begin to integrate banking structures as quickly as possible to facilitate visibility of cash. Standardized models allow corporates to automatically consolidate its cash where appropriate into a centralized hub, and then use it across the globe where necessary.

4. Have the right banking structure

Multinational companies will need to take into account their geographic footprint as well as the various currencies used in their operations. If there are multiple banking relationships across different countries, a global overlay bank can provide a single view and optimize control over the company’s liquidity around the world. Rationalizing the company’s banking and account structures, and improving straight-through processing rates can streamline the cash flow forecasting process and yield more accurate results. In addition, liquidity management structures, such as zero-balance accounts and notional pooling, allow companies to offset credit and debit balances. This means that any inaccuracies that arise within the forecast may effectively cancel each other out. Cash pooling structures also reduce the overall credit lines needed, whereas a decentralized structure may need credit lines in place for each company operating account.

5. Classify cash and label bank accounts

It is important to understand where cash is located and whether there are any restrictions on it. By labeling every bank account with parameters based on what country it’s in, whether there are any FX restrictions and tax requirements, treasury can not only see its cash, but also know how liquid it is. Foreign currency restrictions in a particular country may prevent mobilization of cash, and the local tax regime may impact the amount of cash actually available. In addition, segmenting investment cash into tiers — such as operating, reserve and strategic — can effectively provide a holistic view of how much cash is available and when.

6. Establish clear accountability across the organization

A cash flow forecast is only as good as the sum of its parts. Building the right team of people can help treasury better manage working capital and gain visibility into all processes that touch cash and liquidity. It is helpful to assign ownership to each area of the forecast, such as accounts payable, accounts receivable, purchasing and sales — and consider linking the forecasting accuracy to those individuals’ overall performance review and /or bonus. For multinational companies, it’s important that regional teams really know the business in order for them to connect treasury to what’s going on outside of headquarters, and feed whatever they’re hearing into the forecast.


7. Establish regular routines and communications

The importance of cash flow forecasting as a strategic exercise should be communicated to stakeholders and reinforced on a regular basis. The regularity of forecasting must be the same across the organization. Although challenging, all subsidiaries should be required to buy-in to a ‘bottom-up approach’ to internal reporting throughout the company. This type of standardized approach is essential to providing the necessary snapshot. Regular forecast meetings, including all areas of accountability, can be used to conduct internal benchmarking and variance analyses, and highlight any areas in which the forecast has gone awry. Regular routines and coordination with the operating teams throughout the year will also help identify any changes that should be reflected in a revised forecast.

8. Measure success

Forecasting is an art, not a science — which means there’s always room for improvement. Establishing metrics and measuring them against the forecast allows the treasurer to track the extent of deviations from the original forecast. Variance between forecast and actual should be measured and broken down by business unit in order to either identify and address areas for improvement, or recognize those who are forecasting accurately.

9. Keep long- and short-term forecasts aligned

A company’s short-term cash flow forecast should reconcile with the longer-term financial plan. The two are usually created by different groups within the company — and may diverge over time if they are not regularly monitored and adjusted. If the company is substantially ahead of its cash flow forecast halfway through the year, the longer term plan will need to be updated accordingly.

10. Expect the unexpected

Any number of small and large misfortunes can happen, and not all can be predicted, so it’s important to draw up contingency plans that will allow immediate access to cash if the need arises. A strategic player within the company should lead a team in developing, reviewing, testing and prioritizing actions that should be taken if unforeseen events impact the company’s cash flow. These contingencies should include establishing adequate credit lines and identifying where and when cash is available in the event the treasurer needs to move it around quickly.


The more accurate the forecast, the greater its value is to the organization. While some variance is inevitable, there is plenty that treasurers can do to make the processes more efficient and improve the accuracy of the data. By adopting the disciplines outlined above, companies will be in a better position to streamline the forecasting process, adapt the forecast to internal and external changes – and deliver more accurate results.

Dick Sherrod
Dick Sherrod
Treasury Practitioner Executive Global Treasury Solutions
Bank of America Merrill Lynch


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