Posted on: March 19, 2015
Cash is King
If Cash is King and the lifeblood of all good companies, why have we not perfected the art of forecasting cash flow? Treasury departments today most certainly have a need for better forecasts and improved cash collections. In a 2014 survey of Treasurers by Kyriba they learned that more than half of those polled considered their cash forecasts only “somewhat accurate”; meaning having some significant variances. While none or 0% of the respondents considered their forecasts extremely accurate. This is an alarmingly poor statistic considering that today cash forecasting represents an important, if not the most important tool in a corporate treasurer’s toolbox.
“Accounts Receivable is among the largest and most liquid assets on the books of most companies of most companies. A properly managed accounts receivable portfolio can expedite cash flow and support corporate cash requirements.” – Inc.. The top reasons for not managing AR properly include 1. Receivables data being located in multiple, disparate financial systems, 2. Using the “best guess” or “my experience tells me” methodology and 3. Inadequate forecasting tools. In a recent webinar hosted by FCIB we conducted a survey of credit professionals. When asked how many were still using Excel to forecast their cash collections, an overwhelming 90% answered Yes.
So what’s the Problem?
The management of liquidity and risk is always near the top of the treasury strategies. To maintain constant awareness of the financial health of their enterprise treasurers are required to control liquidity and accept a certain level of. The ebb and flow of businesses makes identifying useful patterns and trends difficult. Seasonality of cash collections or unpredictable acquisitions adds to the difficulty in cash forecasting. Historically the process is long and labor intensive. Today’s “do more with less” staffing methodology does not allow us enough time to fine tune the process. We often lack systemic ways of identifying the disputes and deductions that contribute to slow or nonpaying customers.
Achieving forecasting Nirvana
An article on the Treasury Insights website tells us that “Those that take a modern approach to cash forecasting must account for volatility, manage costs and growth, identify business drivers, and facilitate the process. This approach may be assisted by investments in technology such as Business Analytics…” To manage cash flow forecasts we need accurate, up to date information. Access to current and historic information is pivotal in anticipating the payment patterns of the future. Predictive Analytics provides this exact solution. The successful treasury department of tomorrow will employ this high ROI, low cost approach to honing their cash flow forecasting.
A modern approach
Analytics help us to discover meaningful patterns in data. We harness the power of data from multiple sources, both recent and past to see a picture of actual results and future predictions. The real power comes in bringing together data (e.g. big data and data warehouse) into one centralized repository. Think about deriving forecasts from all of your financial systems regardless of time, location or source. Analytics derive their outcomes from extensive mathematical modeling and computations utilizing advanced statistics and machine learning. They provide us with sophisticated visualizations that open up a world which allows us to understand patters and generate accurate cash projections. Today’s spreadsheet forecasts only provide single-source, two dimensional tabular reports on current period information. Analytics opens up a world that allows us to see in multi-dimensions with 360⁰ views into current, historic and future business outcomes. According to Ernst and Young Advisory Services group “Analytics is not a ‘nice to have,’ but a ‘must have’.” Analytics allow the modern treasury department to take a proactive and thoughtful approach to their cash forecast model.