What Are the Characteristics of a Successful Cash Forecast?

  • By AFP Staff
  • Published: 1/23/2023

Forecasting ChartForecasting remains one of the key areas treasurers continue to evolve and refine. But what are the characteristics of a successful cash flow forecast?

AFP’s Tom Hunt, CTP, director of treasury services and payments and Mina Nasif, CTP, managing director, partnerships and MEA, Beacon FinTrain with AFP, recently met with a group of treasury professionals from the Middle East and Africa (MEA) region to get their take on it.

Strong engagement,” said one treasury professional. “Know your stakeholders and build good relationships with them. You also have to have a team of dedicated people for whom the main task of their job is monitoring the cash flow.” Part of this too is the fact that internal stakeholders need to understand what information is essential in order for treasury to be effective.

“You also need to have clear visibility — from every side,” said another treasury pro. There should be a clear path of accountability for all information sources, whether from internal sources or external, such as your banking partners. For example, if you have good records coming from both accounts payable and accounts receivable, then your forecast “will be very close to reality.”

This point also speaks to the importance of the quality of your data. “Quality is critical,” said another professional. “If the data isn’t good enough, your cash flows are worthless.” The fact that data comes from so many different sources such as outside partners, procurement and sales teams, business analysts, and so on, is one of the challenges treasures are constantly grappling with: the lack of quality data.

An important follow-up point to this is that if your product line hasn’t changed, then you know your market proposition. Your salespeople can provide you with quantitative data in that case. Less predictable data follows when you’re launching a new product line.

Another professional boiled it down to this: simplicity, collaboration and communication, and data quality. “I call it a forecasting cycle, and the wider the cycle, the poorer the quality of your cash forecast,” she said.

“Our intelligence and knowledge as treasurers must also be part of the equation,” said another treasury professional. “Using our knowledge of the business to gather as much information as we can, and to be as accurate as we can, is one of the keys for success we don’t talk about as much.” For example, in her industry, she knows that salespeople will underestimate the numbers they provide for themselves to guarantee that they can meet their targets, but as the treasurer, she also knows, from her experience preparing the forecast year after year, that sales will drop during July and August due to the seasonality of their business, so she can differentiate between the data given to her and the reality that will help her to validate forecasting.

The time period chosen is also a factor, primarily short-term versus long-term forecasts. “When we talk about short-term forecasts, say a month, we may know the numbers already — we have the actuals available, the payables, payroll, etc. We’re relying on real-time data. Whereas when we’re figuring a long-term forecast, we need to depend on historical data.”

Given the answers to the initial question, we asked the group, “Would you categorize cash forecasting as more of a science or an art?”

“I’d say it’s a mix of both,” said one professional. “There are rules, of course, and a framework, but within that framework, are the people building it, so it’s art framed by science.”

Looking for more? Learn about cash forecasting best practices, methods and more.

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