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:

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.

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