Overcoming obstacles in cash flow forecasting

Accurate cash flow forecasts can build confidence in the business as they provide visibility into the future and allow more control over cash flows. Short, medium and long-term cash forecasting are essential for organizations. Yet, there are still too many challenges treasury and finance departments need to tackle to predict future cash positions, avoid crippling cash shortages, and earn returns on any cash surpluses they may have efficiently. 

8 challenges of cash flow forecasting 

When talking to clients about the challenges they’ve faced before using a cash forecasting solution, eight challenges tend to come up during these discussions. If you are still creating your forecasts with spreadsheets, chances are high that you’ve experienced some of these challenges before. 

1. Manual work

Working with spreadsheets to create accurate forecasts is extremely manual. It’s still a myth that working with spreadsheets could save money and it’s easy and flexible and can be easily shared with your team.

Yes, it may save some money, but the ease of use is debatable. You need to get the data from many different sources and then create the reports manually. When you work with contributors on the team and you are sharing the files, it also leaves space for errors, especially if the others are not quite sure about which macros and formulas you’ve used.

As we’ve written in a previous article, the European Spreadsheet Risks Interest Group has found that approximately 94% of spreadsheets include errors so considering more state-of-the-art solutions could be wise. 

2. Lack of automation

Working with spreadsheets and not using software for cash forecasting also means that you are also missing out on the benefits of automation.  

With automation, you can automate routine tasks to better forecast liquidity positions and the data can be automatically sourced from different sources.  

3. Data in multiple sources

Perhaps the most inconvenient aspect of creating liquidity reports and cash flow forecasts is that the data you need to do your job can be scattered across different systems like ERPs or TMS systems. 

When you are using a cash forecasting software solution, the systems can be integrated (e.g., via APIs) and the data is mapped to match the appropriate grouping of your software. This way, you have all the data available at your disposal to create the reports you need. 

4. Multiple bank accounts

To create the reports, you also need instant access to bank account balances on the daily basis. This can be challenging especially in global companies with bank accounts in multiple countries.  

With software solutions, you can connect your bank accounts to the software so that you will have a view of all bank account balances in a single place. 

5. Working across subsidiaries

When you work with subsidiaries, you need to rely on your colleague that can be on the opposite part of the world in a different time zone. This can result in disruptions in getting the data on time. It can be also challenging to know the bank balances if you need a physical token to access the bank account.  

When you work globally, local currencies and the volatility of the currencies can also make your cash flow forecasts more unpredictable. 

6. Selecting the right forecasting method

In another article, we’ve talked about best practices and the importance of having a plan and sticking to it.  

Selecting the right forecasting methods can be a challenge – after all, you want to cover everything important. Identify what’s the most important for your business. You can create forecasts for operating flows, investment activities, or financing cash flows. 

Although you need to have a plan and stick to it, it doesn’t mean that you shouldn’t keep improving your reports and forecasts. Monitor the reports you’ve created closely and see what’s working the best for your business. Again, when you use software and you automate routine tasks this aspect of cash flow forecasting will also become less challenging. 

7. Improving the forecast variance analysis

Comparing actuals and forecasts can be time-consuming, but this is absolutely critical so that you can keep improving the accuracy of the cash flow forecasts. With software solutions, it gets easier to find any disparities and understand what has caused them. 

8. Identifying trends and patterns

With software, it’s easier to compare historical data to find trends and patterns that can help you to improve forecasts and predict the future more accurately. 

How to overcome these cash forecasting challenges?

If you are going to continue forecasting with spreadsheets, internal communication will remain important. Make sure that people understand the logic behind your forecasts for example by documenting them promptly. 

If you decide that it’s time to look for a cash flow forecasting tool, create a list of vendors that provide solutions, evaluate what they offer, and select a few you’d want to talk to. Prepare for the discussions by creating a list of what are your challenges and what features are important for you. You will need support from IT, so you can involve them in the selection to find a partner that can support you with all the integrations and bank connectivity setups. 

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