Why Companies Forecast Cash


As cash is central to everything an organization does, it’s right that companies devote time and effort into forecasting cash, especially during difficult times.

Companies forecast cash for a number of reasons:

  • To maintain liquidity and optimize yield. All organizations need sufficient cash to manage their operations. Then, knowing they have enough liquidity to meet their needs, companies will minimize any liquidity buffers they hold, to maximize the cash available to be invested elsewhere.
  • To monitor debt. Finance needs to be able to show stakeholders that any debt covenants are being managed and any loan repayments are on schedule.
  • To manage working capital. Along with other departments, finance will have a range of KPI targets to meet, ranging from cash ratios to DSO and DPO numbers. The board will review finance’s performance against budgeted expectations, as an indication of operating efficiency.
  • To provide information to investors. Investors will track whether the company is performing as expected, using many of the same working capital metrics.

Given these different objectives, many companies develop multiple forecasts, each to meet a specific need. Of these, some are some focused on liquidity, while others are aimed toward managing stakeholders. Standard liquidity forecasts are generally proactive, with forecasts built using transaction data from banks and internal sources. Forecasts designed to manage investor relations tend to be more reactive, relying on retrospective data from published financial statements.

Yet both techniques suffer from a lack of immediacy. Liquidity forecasts are often too cumbersome to provide real-time insight. And forecasts for investors are more of a reporting tool than an aid to improved decision-making. It means that too many companies are making decisions on forecasts that are not much more than an extrapolation of historical data. Moreover, developing multiple forecasts is time-consuming and inefficient.

Finance needs to be able to act on a forecast for it to be meaningful, whether that is to maximize liquidity or to ensure a key metric is met. That means getting smarter about the way forecasts are created by using tools, like machine learning and AI, to identify trends in cash performance.

For Carlos Vega, Tesorio’s founder, actionable forecasts are key. “People want a real-time forecast that shows what is happening and allows the company to take action, whatever the reason for forecasting,” he explains. “As an example, if you are considering paying off a debt early (this month, rather than next week, in the next fiscal quarter), you need a proactive forecast.” Finance needs to see the impact on cash before making any decision and only a proactive forecast, updated in real time, provides that necessary insight.

More generally, finance needs visibility to cash to make effective decisions. For each cash flow, “the gap between the expense or income and the actual cash event is hard to keep track of, but has real implications for how you run your business,” explains Vega. “Having that automated for you as a CFO and the finance team is really impactful. It helps finance understand what is happening across the business and that information then helps drive other decisions in other teams.”

And, critically, automation means a company only needs one forecasting process, improving visibility and enhancing efficiency at a stroke.