The Future of Cash Forecasting
By Veena Gundavelli and Jack Pacheco
Cash Forecasting Increasingly Critical
In the current economy, cash is the king, and cash forecasting is more important than it has ever been. Cash is not as readily available as it was before, so companies are looking into ways to gain better visibility into cash flow and to monitor it for better planning. There is a growing need for companies to forecast more accurately because in addition to tightened cash flow, there is an increasing need for timely forecasts as market conditions have become volatile.
Cash flow from receivables is the critical component in working capital management, and the ability to forecast cash inflow is critical. Credit and collections departments now have increased responsibilities to increase their efficiency, eliminate cash flow bottlenecks and to report the ever-changing patterns of payments from customers. This information helps finance organizations to plan for cash management efficiently across all operations.
Most ERP systems give cash forecasting based on the company's net terms. They do not provide cash forecasting based on customer DSO history. Likewise, they do not give an intuitive look into when the payments will come in. Third-party tools are gaining ground by giving finance departments the ability to provide accurate cash forecasting with reduced administrative overhead.
Thinking Inside of the Box
Lately, there has been debate about whether cash forecasting is best done by people or by a box. It's probably best done by a combination of both. Software tools give you a good starting point. You put as much intelligence as possible into the tools. In this case, let's call it the box. You review what the box tells you and make the final changes manually to produce a cash forecast.
Your starting point is the open accounts receivables. The box should take the invoice dates and space those out based on past payment patterns of the customers. Most systems can keep the customer DSO and average day you receive the payment for your customer. In most cases, cash forecasting based on past payment patterns provides fairly reasonable cash forecasting. This forms the baseline of most cash forecasting tools.
In the current economy, cash is the king, and cash forecasting is more important than it has ever been. Cash is not as readily available as it was before, so companies are looking into ways to gain better visibility into cash flow and to monitor it for better planning.
Now you need the capacity to refine the baseline cash forecast. This requires the ability to record the impact of changes based on knowledge gained by your collectors in speaking to the customers. If the collector knows, from talking to a customer, that a big payment will come in later or earlier than was forecasted, the program should have the ability to shift the forecast accordingly.
This combination of baseline cash forecasting and capturing knowledge from collectors with real-time changes incorporated is a fairly accurate cash forecasting tool. Once you have an accurate cash forecast and use this data to set goals for your staff, you now can point your collectors in the right direction. Your forecasting software should give you the ability to monitor how your actual receipts are doing against the forecasts and to quickly tell you where you are falling short.
If you do a weekly cash review based on cash forecasting and actual receipts data, customer problems are quickly escalated. Visibility is also very important to reduce the cash conversion cycle. The longer the receivables are open, the lower the chances of getting paid. Any information that can accelerate the process can help companies tremendously.
Looking Ahead
In summary, cash forecasting tools are likely to include the following capabilities over the next two years:
- A quick baseline forecast of when you should be paid, based on customer history.
- The ability to refine the baseline forecast, based on collectors' knowledge of daily customer interactions.
- Visibility into the numbers to locate problems and resolve them rapidly.
The ability to collect data faster and to have accurate, constantly updated cash forecasts can have several other advantages. Operationally, collectors can then focus more on collections instead of preparing data for cash forecasting. Currently, most collectors spend about 10 to 15 percent of their time on gathering and preparing data for cash forecasting. As in other facets of business, modern tools will provide the ability to manage cash forecasting with lowered costs.
That said, the human elements of cash forecasting and collections will probably never be eliminated. Good customer relationship management cannot be ignored, and will always be an important part of collections and accurate forecasting, though it seems likely that technology will creep more and more into the picture.
Finance departments have traditionally been very conservative in adopting new technologies-and in most organizations have continued to use spreadsheets, manual and paper-based systems. Right now, only "early adopters" of new technology are employing the types of tools discussed above for their cash forecasting. Within a couple of years, this sort of functionality seems likely to become the norm rather than the exception. The early adopters will gain a short-term advantage over their competition, but these technologies will, in all likelihood, eventually become the rule.
The current state of the economy may actually speed this process, since companies are looking for ways to gain a tighter grip on their existing revenue streams. CFOs also are facing increased pressure from Wall Street to produce accurate cash forecasts.
While no crystal ball is perfect, one thing is for sure: CFOs and finance professionals won't stop looking for ways to do their jobs better, faster and cheaper. For this generation of finance professionals, there are new technologies there to greet them.
Veena Gundavelli is president and CEO of Emagia Corporation. Emagia can be reached at 866-EMAGIA-1 or visit www.emagia.com.
Jack Pacheco is CFO of Ignis Optics..
