Treasury and FP&A both develop forecasts to inform decision-making. Forecasts are developed for: the short-term, to help treasury ensure the company has sufficient cash to meet upcoming obligations; the medium-term, to ensure access to sufficient credit lines; and the long-term, to help ensure the capital structure can support the delivery of the business strategy. Although all these forecasts are, by definition, forward-looking, the information available to develop them varies over the time horizons. A company’s approach to forecasting the cash position over the next week is clearly going to be different to its approach to its three-year forecast. Each type of forecast can support decision-making in different ways. 

Short-term forecasts

Short-term forecasts are used to help treasury determine whether there will be sufficient cash to meet short-term operations, or whether there is a need to drawdown additional funds. If there is likely to be surplus cash, treasury can also plan to invest it.  

Developing a clearer view of the underlying cash flows that constitute short-term forecasts can help treasury make strategic decisions on working capital management, supply chain management, and short-term funding. 

Medium-term forecasts 

Over longer time horizons, forecasting gets more difficult. Medium-term forecasting usually describes the period beyond the current, established payment terms, when payables and receivables are largely forecasted from budgets or previous years’ data rather than contracted procurement and sales. Although some cash flows will be predictable (e.g., loan repayments), many more remain uncertain and are extrapolated from sales and procurement forecasts.

Many organizations develop medium-term forecasts on the basis of ratio analysis rather than a strong confidence in actual cash flows. By working with FP&A, treasury’s clearer understanding of the nature of the underlying cash flows, and the way they are correlated, can help to bring more granularity to medium-term forecasts. By understanding the individual cash flows, treasury can work with FP&A to develop more dynamic forecasts that can model changes in the timing and quantity of cash flows. For example, changes of a few days in DSO, whether caused by shipment delays or weakening customer credit, may not make much of a difference to the end-of-month cash position, but it could increase the company’s medium-term funding requirements. Having an early warning of changing positions will help the business, and treasury in particular, to plan for the different circumstances.  

Long-term forecasts

Long-term forecasts support decision-making on capital allocation, long-term fundraising, and to identify scope for mergers and other capital actions. Treasury can add value by helping management to understand the risks associated with different business strategies. Over a longer period, companies consider their capital structure (i.e., the balance between debt and equity), and treasury can help to model how different decisions can affect the flexibility of a company’s funding strategy. Treasury can also help management to understand how different strategic decisions can affect the company’s exposure to financial risk. Treasury’s input will help management to achieve an acceptable balance between risk and reward when setting business strategy.