Cash Forecasting – Better Practice

Robust cash forecasting practices are essential for monitoring working capital performance, managing liquidity, informing key business decisions and highlighting areas for improvement.

1. What forecast period is appropriate?

Cash forecasts are ordinarily viewed across two horizons – short term (typically 13 weeks) and long term (12 months up to 3 years) as part of a three-way integrated model.

2. How do the different types of forecast differ?

The short term forecast is used to establish the cash “runway” and should reflect and help confirm a business’ working capital cycle and any immediate funding needs. The long term forecast is required to support the strategic planning process, provide a direct link to the P&L performance and should be used to show potential scenarios, risks and sensitivities.

3. What process should be followed when developing a cash forecast?

The process for preparing a forecast is a key indicator of how robust and reliable the forecast is likely to be. Importantly, the process must involve key stakeholders from across the business who are involved in managing the different aspects of the working capital cycle (from sales, procurement, operations and finance). The following stages are recommended in preparing the forecast: i) Planning, ii) Design, iii) Build, iv) Test, v) Approve. At all stages, clear communications from the Board and senior management on the importance of cash forecasting should be maintained. Another vital step in developing a robust forecast is variance analysis. Management teams should regularly track actual performance and refine forecast assumptions accordingly.

4. Can short term cash forecasting be automated?

Automated feeds from ERP systems should be included in the set up of cash forecasts where it is appropriate to do so. However, some manual adjustments may be required. Examples of this include the “unwinding” of known debtor and creditor balances for short term cash forecasts where expected customer receipt and supplier payment dates may differ from standard terms.

5. What framework is needed to support the cash forecasting process?

Robust cash forecasts are only one element of a strong cash management framework. Clear procedural guidance, a documented responsibility assignment matrix, working capital reporting and dashboards, and performance targets are all important for optimising the conversion of earnings to cash.