11 reasons to implement a cash and liquidity forecasting solution

What’s our projected cash position over the next three months? Six months? Twelve? Are we expecting potential cash shortfalls? When? How will sales drops or cost increases impact us? 

Answering critical cash and liquidity questions

If you work in treasury or manage corporate cash, these are the questions you should be asking. You need to stay liquid. You need to maintain enough cash (or other readily convertible assets) to meet your financial obligations: pay wages, loans, bills, and taxes when they’re due.

Markets fluctuate, the economic landscape shifts, unexpected expenses emerge – all in a day’s work. You must stay on top of your cash inflows and outflows, and you must get them right. Misjudge timing, and you might find yourself in an awkward spot with very few options.  Why not be prepared? Why not forecast cash and liquidity?

Meet the experts

When the markets change and the rates tighten, forecasting cash and liquidity gives you cover and control. It's no wonder that finance teams, CFOs, corporate treasures, or anyone else in charge of company financing are trying to figure out the best strategies to optimize cash reserves and working capital to find the best balance between liquidity and profitability. I was lucky enough to touch base with two of Nomentia’s leading cash and liquidity forecasting experts to discuss the intricacies of liquidity management and why a cash and liquidity forecasting solution might just be the thing your business needs.

Karl-Henrik Sundberg

Karl-Henrik Sundberg is a Senior Product Manager for Cash Forecasting at Nomentia, with nearly a decade of experience at the company. He brings valuable expertise from his prior roles as Director of Group Cash Management and Back Office in a Corporate Treasury, and in cash management software. His deep understanding of cash forecasting and treasury solutions plays a vital role in enhancing Nomentia’s product offerings, ensuring efficient and effective financial management for clients. 

Jouni Kirjola

Jouni Kirjola is the Head of Solutions and Presales at Nomentia, bringing nearly 20 years of expertise to the role. Specializing in payments, cash forecasting, in-house banking, and reconciliation, Jouni has transitioned from product management to presales. His extensive experience and deep knowledge of financial solutions make him a key leader in delivering tailored solutions that meet clients’ needs, driving Nomentia's success. 

"On paper, forecasting cash and liquidity is straightforward—just combine historical data, market conditions, and future plans. In practice, it's a bit more complicated." – Karl-Henrik Sundberg 

Why is accurate cash and liquidity forecasting important?

So, what happens if you don’t forecast cash and liquidity accurately? Well, in such an eventuality, things can go from severe to disastrous in mere moments. On top of the list of inopportune consequences sits, quite justifiably:

• Liquidity crisis: When a company suffers a severe shortage of cash and can’t meet its short-term obligations. As an example, let’s imagine a large corporation that finds itself facing a cash crunch after it didn’t adequately account for the impact of late payments from key clients and was forced to secure emergency loans at high interest rates. 

Similarly sticky situation can quickly develop when a business cannot forecast cash needs accurately, and they're obliged to accept the following:

• Increased borrowing costs: For instance, we can surmise how a retail chain misjudging its cash requirements during a peak season must accept high-interest expenses after resorting to costly short-term borrowing to tie them over this unforeseen liquidity gap. 

But depending on unfavorable external funding isn’t the only issue with inadequate cash and liquidity forecasting. Unexpected liquidity bottleneck is also likely to cause: 

• Operational disruptions: Just consider a business that is unable to pay its suppliers on time, like a food and beverage company. Not having the funds to compensate their suppliers, their entire supply chain is disrupted when the unpaid suppliers withhold critical ingredients.

Even in a situation where the company's cash reserves are more optimized, their inability to forecast their cash and liquidity needs can lead to: 

• Missed growth opportunities: Let’s take a startup that missed out on a potential acquisition because it couldn’t secure the necessary funds in time due to poor cash flow management. Without precise cash flow projections, it’s deceptively easy for companies to miss strategic opportunities. 

"Having a clear view of cash inflows and outflows makes liquidity management effective, helping businesses to weather sudden market disruptions without halting operations." – Jouni Kirjola 

How to forecast cash and liquidity, then? 

You want to stay in business and take action to grow, right? So, how do you bridge money shortages and plan your financials without being bogged down by liquidity squeeze?

On paper, the formula is simple. Just combine your historical financial data, current market conditions, and future business plans to estimate net cash flow over a given time. In practice, it’s a bit more complicated than that.

First, you must: 

1. Gather data and collect all historical financial data, income statements, balance sheets, and past cash flow reports - all to understand past trends and patterns.
2. Then, you must try your best to project future sales, expenses, and investments based on market analysis and business plans. You need to estimate your cash inflows, analyze expected revenue from sales, take into account market trends and seasonality, and also incorporate other sources like receivables. 
3. Next, you must estimate your cash outflows and predict regular operating expenses like payroll payments, rent, and utilities. Estimating cash outflows requires a thorough review of existing commitments, contracts, and historical spending patterns. 

"If businesses don’t accurately project cash needs or forecast liquidity, they could face liquidity crises, rising borrowing costs, and missed growth opportunities." – Karl-Henrik Sundberg

Once all that is done, you’re ready to prepare the forecast. Most likely using: 

Cash forecasting Excel templates or a cash and liquidity forecasting solution

Budgets being tight, it's not surprising that Excel emerges as the go-to cash and liquidity forecasting tool for many. It’s familiar and widely used, and in the hands of a seasoned spreadsheet wizard, it can meet the most singular requirements. But for anyone who relies on current financial data and analytics for strategic planning and decision making, Excel just doesn't cut it. Similarly, if you happen to operate in highly regulated industries across borders and jurisdictions or when experiencing rapid growth, you really should consider switching from Excel to a cash and liquidity forecasting solution. 

Let’s compare: 

Liquidity forecasting with Excel to liquidity forecasting solution 

"Cash forecasting isn’t necessary for all—if you're cash-rich and expect to stay that way, you might not need it. But in tighter markets, it can be the difference between staying afloat or running into trouble." – Karl-Henrik Sundberg

A cash and liquidity solution might not solve all your business issues and problems, but from a financial planning perspective, it will get you on the right track. So, let’s discuss: 

11 reasons to implement a cash and liquidity forecasting solution

Improved cash flow management, risk mitigation, and cost savings rank highly among the reasons for implementing a cash and liquidity forecasting solution. On top of the list: 

1. Precise cash forecasts  

Forecasting based on consolidated and up-to-date cash and liquidity enhances the precision and speed of cash flow projections.

As an example, let’s take a look at a mid-sized retail company that relies on manual spreadsheets and cash forecasting templates to manage its cash flow. Each of their departments sends their financial updates via email, and the finance team manually consolidates this data on a weekly basis. Due to inconsistencies and delays in reporting, their cash projections are frequently inaccurate. For example, not long ago, a large shipment delay in inventory was not accounted for, which caused a significant mismatch between expected and actual cash outflows. 

Cash and liquidity forecasting is made difficult by: 

• Delayed cash flow data from various departments.
• Manual data consolidation increased errors.
• Inconsistent reporting formats across the business. 

In the worst-case scenario, the company could end up underestimating a major cash outflow for inventory restocking and payroll. Insufficient liquidity forces the company to take on emergency short-term borrowing at unfavorable rates, which puts added strain on its profitability.  

Adopting a cash and liquidity forecasting solution the company can ensure timely, accurate cash flow data, and prevent liquidity blind spots. 

2. See cash flow better 

Making liquidity management effective with a clear view of cash inflows and outflows 

A construction company with multiple ongoing projects struggles to track its cash inflows and outflows in real time. Payments from clients are often delayed, and expenses, like contractor payments and materials, fluctuate heavily depending on project schedules. Without a clear view of their liquidity situation, the company frequently misses opportunities to optimize working capital. 

Their forecast suffers from the following: 

• Poor visibility into which projects are driving inflows and outflows. 
• Unpredictable cash inflows from late-paying clients. 

Without clear visibility, the company overcommits to new projects, assuming there will be sufficient cash to cover costs. Mid-project, they run into a liquidity crunch and must halt ongoing work. This delay results in penalties and strained relationships with their clients. Not only that, their employees and subcontractors also face delayed payments, which increases the risk of talent loss and further project disruptions. 

When the company increases its visibility to cash flow with cash and liquidity forecasting solutions, the company can manage liquidity effectively and keep its projects going without the fear of unexpected cash shortages. 

3. Working capital optimized  

Cash and liquidity forecasting helps to ensure that the right amount of cash is available for daily operations without excess idle funds. 

By way of another example, let’s explore a manufacturing firm that holds a large amount of cash in its operational accounts to avoid liquidity shortages. However, this cash could be better utilized or invested. Their working capital is sub-optimized because they cannot precisely forecast how much liquidity they actually need for daily operations. 

Cash and liquidity pain points manifest as: 

• Excessive idle cash that could be invested. 
• Reactive cash management is based on historical trends but not real-time data. 

At worst, the company’s cash is sitting idle and underutilized while it simultaneously misses opportunities for cost-effective inventory purchases or early supplier discounts. Meanwhile, competitors with more efficient working capital are gaining ground by reducing costs and investing in growth initiatives. Over time, the company will lose market share. 

"Misjudging your cash timing can leave you with limited options. Why not be prepared? Forecasting cash and liquidity gives you control over your financial decisions." – Jouni Kirjola

A cash and liquidity forecasting solution can be used to optimize the company’s working capital by predicting cash needs precisely, which allows the business to deploy cash more efficiently and avoid idle funds. 

4. Reduce borrowing costs

Proactive liquidity management helps to avoid unnecessary short-term borrowing by anticipating cash needs in advance. 

To demonstrate, let’s consider an e-commerce company that frequently uses a line of credit to cover its short-term cash needs, particularly during peak sales periods. However, due to poor cash flow forecasting, they often borrow more than necessary or too late, which leaves them exposed to additional interest expenses and fees. 

Liquidity squeezed by:

• Inability to predict cash shortages accurately. 
• Over-reliance on short-term, high-interest borrowing. 

If worse comes to worst, because the company doesn’t anticipate cash flow fluctuations properly, they end up borrowing just days before a major sales inflow. This results in unnecessary interest expenses that could have been avoided had they timed their borrowing more effectively. Over time, these costs erode profit margins and put pressure on long-term financial sustainability. 

By forecasting cash requirements with a cash and liquidity solution, the company avoids unnecessary borrowing and saves on interest costs.

5. Refined financial planning

Cash and liquidity forecasting helps to align cash forecasts with strategic planning, budgeting, and financial goals. 

To illustrate, let’s look at a global software firm which expanding into new markets but struggles to align its strategic plans with real-time cash forecasts. As a result, their budgeting process often misses important cash flow constraints. Also, they are frequently hampered by either overly ambitious or overly cautious expansion plans. 

Cash flow planning pains: 

• Strategic plans are disconnected from cash flow realities.
• Lack of integration between cash flow data and long-term budgeting. 

In the worst possible outcome, the firm might end up investing in new market expansions without understanding the short-term liquidity gaps that will arise from R&D and marketing costs. This forces them to pull back on essential initiatives and delay their time-to-market. Competitors capitalize on this delay and gain a first-mover advantage in key regions. 

With the help of cash and liquidity forecasting solutions, the company can align its cash forecasts with strategic goals and ensure that it can expand confidently without liquidity surprises.

6. Minimizing liquidity risk

Liquidity and cash forecasting make it easier to prepare for potential cash shortages or surpluses by identifying gaps early. 

Let’s take, for another example, a wholesale distributor of consumer goods. The company is facing seasonal cash flow volatility, with large spikes in demand during holidays. They regularly find themselves either scrambling for cash during high-demand seasons or sitting on excess liquidity during slower periods. 

Risking liquidity because: 

• Unpredictable cash shortages during peak seasons. 
• Lack of foresight into liquidity gaps. 

If things go south during the holiday rush, the company experiences a significant liquidity shortage because of delayed payments from retailers. They are unable to fulfill large orders and miss out on critical seasonal revenue. The lost sales impact their annual performance, and they suffer a hit to their reputation with key retail partners. 

Using a cash and liquidity forecasting solution, the business is able to identify cash gaps early, prepare for fluctuations, and prevent costly disruptions.

7. Investment returns improved

A cash and liquidity forecasting solution helps to optimize surplus cash by investing it more effectively and maximize returns. 

To give an example, let’s consider that a global hotel chain typically holds surplus cash from seasonal high occupancy rates. Without a liquidity forecasting tool, they are unable to identify when they will have surplus funds to invest. As a result, the surplus remains in low-interest accounts for extended periods. 

Cash returns strained: 

• Inability to predict and capitalize on surplus cash.
• Missed opportunities to generate returns on idle cash. 

In the most adverse circumstances, the company’s surplus cash sits uninvested for several months. Potential returns are lost. At the same time, competitors are generating higher investment income that allows them to reinvest in property upgrades or marketing efforts. Over the long term, this financial inefficiency limits the hotel chain's growth and ability to compete in an increasingly competitive industry. 

By forecasting surplus cash with a cash and liquidity forecasting solution, the business can invest idle funds more effectively, maximizing returns.

8. Better bank relationship management

Accurate liquidity data and forecasts help to improve negotiations with banks. 

To cite an example, let’s consider a fast-growing tech startup that has multiple banking relationships but struggles to negotiate favorable terms because it lacks accurate, up-to-date liquidity forecasts. Without strong data to support their position, they’re often at a disadvantage during negotiations for credit lines or interest rates. 

Banking challenged by: 

• Poor leverage in negotiating with banks. 
• Inconsistent liquidity data during key negotiations. 

Accurate liquidity forecasts provided by cash and liquidity forecasting solutions strengthen the company's negotiation position with banks.

9. Currency risks managed

Forecasting cash flow in multiple currencies helps to manage exposure to foreign exchange fluctuations. 

Let’s take an international clothing brand that sources materials from several countries and sells products globally. Their cash flow is exposed to currency fluctuations, but they lack the tools to properly forecast cash inflows and outflows in different currencies. As a result, they are constantly caught off guard by foreign exchange swings. 

Currency risks emerging from: 

• Poor visibility into multi-currency cash flows. 
• Unpredictable exposure to FX fluctuations. 

In the worst-case situation, the company incurs a significant FX loss when the dollar strengthens unexpectedly against the currencies of key suppliers. With no hedging strategy in place due to poor forecasting, their cost of goods sold increases dramatically, squeezing profit margins. This sudden cost spike leads to a negative earnings report, sending their stock price plummeting. 

The company’s cash and liquidity forecasting solution helps predict cash flows in multiple currencies, allowing the business to hedge effectively against foreign exchange fluctuations.

10. Better contingency planning 

Cash and liquidity forecasting helps to prepare for economic downturns, market disruptions, or other unforeseen events. 

A global supplier of electronics components is heavily dependent on a few large clients. When one of these clients abruptly delays orders due to a market downturn, the supplier finds themselves in a cash crunch with no contingency plans. 

Contingency complications converge because: 

• Lack of contingency plans for sudden changes in cash inflows. 
• Overreliance on a few large customers. 

If all else fails, the supplier is unable to pay its own suppliers, which leads to production delays. Without adequate cash reserves or alternative financing strategies, they are forced to shut down production lines temporarily. Their inability to fulfill orders causes long-term damage to customer relationships and puts the entire business at risk. 

A cash and liquidity forecasting tool supports proactive contingency planning and ensures the company can weather sudden market disruptions without halting operations.

11. Boosting stakeholder confidence

Liquidity forecasts provide transparent cash flow data to investors, boards, and partners. 

Suppose we look at a private equity-backed healthcare company that is preparing for a new funding round. Lacking a cash forecasting solution, they are struggling to present accurate cash flow data to potential investors and their board. Understandably, the difficulty in providing transparent, reliable financial data raises concerns about their financial management capabilities, which is likely to lead to: 

Pain points: 

• Difficulty in providing transparent, reliable financial data. 
• Eroding confidence among key investors. 

A cash and liquidity forecasting solution provides transparent and accurate cash flow data and boosts investor and board confidence. 

And an extra reason, perhaps the most important:

12. Better support for decision making

Forecasting cash and liquidity provides actionable insights for making informed financial decisions. 

At the end of the day, cash forecasting is a tool, a means to an end. To illustrate this, let’s consider a large food distribution company that is considering expanding into new regions, but its financial team lacks the ability to model how this decision will impact cash flow. Without reliable data, the company’s leadership team is forced to make strategic decisions based on intuition rather than actionable insights.  

Lacking support for decision-making: 

• Inability to model financial scenarios accurately. 
• Decision-making driven by guesswork rather than data 

The company ends up expanding into a new region only to find that cash outflows (transportation, staffing, marketing) outstrip inflows for an extended period. This faithful oversight leads to significant cash flow strain, and they are forced to scale back operations abruptly. The failed expansion damaged their market reputation and led to significant financial losses that could have been avoided with better forecasting tools. 

Actionable insights from accurate cash forecasts enable the leadership team to make data-driven decisions, avoiding costly expansion missteps. 

"Excel works for simpler financial operations, but as businesses grow in complexity, especially with subsidiaries or mergers, it’s time to move beyond spreadsheets." – Karl-Henrik Sundberg

Summary

Businesses should implement a cash and liquidity forecasting solution to gain real-time insights into cash flow and ensure better financial planning. Cash and liquidity forecasting tools support informed decision-making, reduce risk, and improve overall financial stability:

• Accurate, real-time cash flow visibility to avoid shortfalls or excesses.
  
• Enhanced decision-making with data-driven insights and scenario modeling.
  
• Seamless integration with ERP and banking systems for efficient data management.
  
• Improved cash control, optimizing liquidity and working capital across the business.

Nomentia for cash and liquidity forecasting 

Nomentia's cash and liquidity forecasting solutions provide businesses with real-time visibility into their cash inflows and outflows, enabling more accurate and efficient financial planning. By consolidating up-to-date financial data, the platform automates cash flow projections, helping companies make informed decisions and avoid unnecessary short-term borrowing. Nomentia streamlines liquidity management and aligns forecasts with strategic goals to ensure that businesses maintain the optimal cash position for operations and growth. 

"A proper forecasting tool supports proactive contingency planning, ensuring that a business is never caught off guard by market shifts." – Jouni Kirjola 

Read more

• 10 Ways to improve your cash flow forecasting
• A guide to cash flow forecasting tools in 2024
• 6 Key best practices in cash flow forecasting
• Top 10 best cash flow forecasting software providers