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Cash forecasting in a time of global uncertainty: the need to refresh data frequently

John Champion - January 10, 2019
Cash forecasting in a time of global uncertainty

We are in uncertain times. As Larry Summers discussed in an article in the Financial Times earlier this week, many economists believe a recession in the next two years is more likely than not.

In addition, trade worries continue to trouble markets. Lead by a United States caught in a spiral of rising protectionism, corresponding trade wars are affecting major economies across the globe. Further affecting trade, the United Kingdom is approaching the unchartered territory of Brexit with little apparent planning, preparation, or even a target destination.

Perhaps discouraged by the rocky Brexit process so far, the remaining EU members seem, for now at least, to be more closely embracing EU membership, although they are not totally free of concern. Many are facing widespread protests (such as the gilets jaunes in France) or the rise of the far right (such as the AfD in Germany).

All of this has major impacts on currency and stock market volatility, business and consumer confidence, and therefore corporate decision making.

Increased focus on cash forecasting

This uncertainty can make life difficult for corporate treasurers, financial controllers, and CFOs.

Tariff introductions, rule changes, and conditions after Brexit mean that cross border payments could become a headache (and carry as yet unknown costs).

Tightening of conditions and volatility in markets mean that, from an operational perspective, management of excess liquidity and debt levels becomes increasingly tricky.

This leads to an increased focus on cash and liquidity forecasts. As corporate treasurers know, a good cash forecast can help guide decision making and help to plot a route around the obstacles presented by volatile markets.

However, the factors that are behind the need for improved accuracy are the same factors that have a damping effect on forecast accuracy.

The need to refresh data frequently

In such a volatile environment, the type of new information that can have a transformative impact on cash flows is released regularly. Therefore, the need to be able to quickly and easily refresh forecasts is of vital importance.

Say, for example, that a firm generally runs a 13-week cash forecast. Under usual circumstances they might refresh this forecast weekly (or monthly if it is part of a hybrid forecast which combines different time horizons). In this example, the firm is a U.S. multinational that will be heavily affected by tariffs on steel imports. When the details of the tariffs are announced, the CFO opens a channel to the Treasurer wanting to know how this will impact cash flow.

The Treasurer needs to provide an answer quickly, therefore refreshing the forecast needs to be a quick and easy task.

Forecast Review Refresh

Hurdles to overcome

If the cash forecasting processes are manual and administratively heavy, a speedy refresh is not usually possible without throwing bodies at the problem. However, this means taking highly qualified personnel away from high value activities and reallocating them to administrative work.

Moreover, pulling in lots of people to help turn the task around with speed, sharply increases the risk of human error, jeopardizing the drive for the increased quality requested at the outset.

To exacerbate these hurdles, in a volatile environment, this data might need to be refreshed several times in quick succession as new information becomes available.

Staying in control of the process

Surrounded by a world of uncertainty, a Treasurer or Financial Controller can find a well-managed cash forecasting process to be a life raft.

The best cash forecasting process in these circumstances, the one that most supports key strategic decision makers, is the one that offers them the most control.

To achieve this degree of control, the process needs to be robust, reliable, and, most of all, quick. To ensure speed while reducing the risk of human error, the administrative burden must be removed from the equation. The only way to do this is to manage the process with dedicated cash flow forecasting software.

How does software aid the process?

To demonstrate how software aids this process, let’s review the example of the U.S. headquartered multinational concerned with the impact of import tariffs. Because of the volatility of the situation, the CFO will most likely be requesting an updated liquidity forecast every time a key piece of information becomes available (i.e. when new suppliers are identified, when retaliatory tariffs are announced that affect the company’s sales, etc.)

With an automated cash forecasting process, as soon as new details become available the data can be refreshed and new expectations included quickly and easily, with the results presented on an intuitive dashboard offering the ability to drill down to the required degree of granularity or roll-up to broad headline numbers.

(More detail on how this is achieved can be found in our post on cash forecasting automation.)

How long does this take to implement?

With the current levels of global geopolitical uncertainty unlikely to stabilise any time soon, now is the time to act.

If the right tools are selected, that is to say software that is specialised for cash forecasting, new processes can be built and rolled out within six weeks, and for less than the cost of a salary.

The lesson, therefore, is that further delaying the deployment of these tools can cause unnecessary difficulty when the solution is so easily within reach.

After all, the journey is always that much easier when you know what lies just over the horizon.

About CashAnalytics

CashAnalytics has helped many companies across a broad range of industries to build and maintain best-in-class cash forecasting processes that produce the highest quality reporting and analytics outputs.

If you would like to see a demonstration of how software and automation can improve your cash forecasting processes, or would like to see the business case for introducing CashAnalytics to your company, please contact us directly.