{"id":156,"date":"2020-11-13T04:33:22","date_gmt":"2020-11-13T04:33:22","guid":{"rendered":"https:\/\/www.emagia.com\/blog\/?p=156"},"modified":"2025-01-28T22:40:42","modified_gmt":"2025-01-29T04:40:42","slug":"four-essentials-of-cash-flow-forecasting-model","status":"publish","type":"post","link":"https:\/\/www.emagia.com\/blog\/four-essentials-of-cash-flow-forecasting-model\/","title":{"rendered":"4 Essentials of Cash Flow Forecasting Model","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"<p>Accurate <strong>cash flow forecasting<\/strong> helps achieve excellence in cash management. As the adage goes, \u201ccash is the lifeblood of business, and will remain so.\u201d The latest <strong>cash flow forecasting methods<\/strong> are powered by intelligent technologies to make accurate cash forecasts to reduce manual efforts and improve operational excellence.<\/p>\n<p>Cash flow forecasting is a method that involves predicting cash inflows and outflows over a period of time as accurately as possible. Accurate cash flow prediction is a prerequisite for optimizing short-term borrowing and investing in normal times. During economic uncertainty, <strong>cash forecasting models<\/strong> gain further importance. Major actions \u2013 such as staff reduction, delayed payments to suppliers, increased borrowing \u2013 may have to be taken up when cash resources are inadequate to fund current and future operations.<\/p>\n<p>Major cash flows include payroll, disbursements to suppliers, repayment of debt, collections of receivables, royalties, dividends, and proceeds from issuance of equity and debt. Our focus will be on forecasting cash inflow from <a href=\"\/products\/receivables-management-and-automation-software\/\"><strong>accounts receivable<\/strong><\/a> ledger (AR) which is the largest recurring operational source of cash for most companies.<\/p>\n<p>As with most business processes, the accuracy and efficiency of cash flow forecasting methods can be greatly improved using digital technologies such as machine learning (ML) and artificial intelligence (AI).<\/p>\n<h2><strong>The essential elements of cash forecasting aided by digital technologies are: <\/strong><\/h2>\n<ul>\n<li>Consolidation of account receivables data across divisions and ERPs<\/li>\n<li>Predictive Modeling<\/li>\n<li>Analysis and Simulation<\/li>\n<li>Tracking and Monitoring<\/li>\n<\/ul>\n<p class=\"border text-center p-3 rounded border-primary mt-4 mb-4 bg-light\"><a class=\"text-decoration-none\" href=\"\/resources\/ebooks\/accelerate-cash-flow-and-reduce-costs-with-digital-payments\/\">Accelerate Cash Flow and Reduce Costs with Digital Payments. <strong class=\"text-decoration-none font-weight-bold\">Read eBook<\/strong><\/a><\/p>\n<p><strong>Now let\u2019s look at each of these.<\/strong><\/p>\n<h3><span id=\"1-consolidation-of-ar-data-across-divisions-and-erps\" class=\"ez-toc-section\"><\/span><strong>1. Consolidation of AR data across divisions and ERPs<\/strong><\/h3>\n<p>Accurate cash inflow forecasting for a company must include all cash. Automated consolidation of all data across units of the company (which may have different ERPs) is essential. A global view, displaying different currencies, is required. Without it, finance staff will have to compile the forecast semi-manually using Excel <strong>cash flow forecasting model<\/strong>. This can be very time consuming and requires significant elapsed time, which is a disadvantage when trying to react to new developments.<\/p>\n<h3><span id=\"2-predictive-modeling\" class=\"ez-toc-section\"><\/span><strong>2. Predictive Modeling<\/strong><\/h3>\n<p>This is the engine of <strong>cash forecasting using AI and ML<\/strong>. Best practice requires that forecasts be multi-dimensional; that is forecast using different methods with the expectation that all the forecasts will converge on a narrow range of outcomes. Key dimensions are:<\/p>\n<ul>\n<li>\u201cIdeal\u201d which forecasts cash receipts if every invoice was paid on its due date. This serves as an upper boundary more than a forecast.<\/li>\n<li>Predictive payment behavior which forecasts receipts at the invoice and customer level based on historical payment performance and predictive analytics. About 80% of the cash flow forecasts are derived from the historical average days to pay. The other 20% is compiled using artificial intelligence to project payment date. Both types of forecast utilize machine learning to continuously improve their forecasts. This yields high forecasting accuracy but requires the powerful computing power that digital technologies can provide.<\/li>\n<li>Collector forecasts, which is an accumulation of all \u201cPromises to Pay\u201d logged in the collections module. Accuracy depends on the quality and completeness of collector input. An alternative method is to use the aggregate cash collection targets established for the month.<\/li>\n<\/ul>\n<h3><span id=\"3-analysis-and-simulation\" class=\"ez-toc-section\"><\/span><strong>3. Analysis and Simulation<\/strong><\/h3>\n<p>This capability is used to verify the accuracy of the forecast and to understand and plan for substantial cash shortfalls. Key capabilities are extensive drill-down (to invoice and customer level) to understand details of the forecast, and robust \u201cWhat If\u201d simulation to understand the magnitude of the downside of inaccurate forecasts.<\/p>\n<h3><span id=\"4-tracking-and-monitoring\" class=\"ez-toc-section\"><\/span><strong>4. Tracking and Monitoring<\/strong><\/h3>\n<p>Improvement in cash flow forecasting accuracy is driven by examining variances from actual, understanding their cause, and correcting methods, data sources, etc. It is an iterative process that can be a powerful tool. Here again, extensive drill-down capabilities enable the improvements.<\/p>\n<p>In this uncertain economy, forecasting cash accurately and efficiently is critically important. Semi-manual forecasting may not achieve the accuracy required and may divert key staff from driving <a href=\"\/resources\/videos\/predictive-analytics-a-smarter-way-to-boost-your-cash-flow\/\"><strong>cash flow to predicting<\/strong><\/a> it.<\/p>\n<p>Digital cash forecasting provides the capability to analyze huge amounts of data, predict with more accuracy, and do it fast so forecasts can be run as often as needed.<\/p>\n<p><a href=\"\/products\/cash-flow-forecasting-software\/#request-demo\"><img decoding=\"async\" src=\"\/blog\/wp-content\/themes\/mainblog\/assets\/images\/blog-banners\/make-accurate-cash-flow-forecasts-using-ai.jpg\" alt=\"Make Accurate Cash Flow Forecasts Using AI\" width=\"898\" height=\"200\" \/><\/a><\/p>\n","protected":false,"gt_translate_keys":[{"key":"rendered","format":"html"}]},"excerpt":{"rendered":"<p>Accurate cash flow forecasting helps achieve excellence in cash management. As the adage goes, \u201ccash is the lifeblood of business, and will remain so.\u201d The latest cash flow forecasting methods are powered by intelligent technologies to make accurate cash forecasts to reduce manual efforts and improve operational excellence. Cash flow forecasting is a method that &hellip;<\/p>\n<p class=\"read-more\"> <a class=\"\" href=\"https:\/\/www.emagia.com\/blog\/four-essentials-of-cash-flow-forecasting-model\/\"> <span class=\"screen-reader-text\">4 Essentials of Cash Flow Forecasting Model<\/span> Read More &raquo;<\/a><\/p>\n","protected":false,"gt_translate_keys":[{"key":"rendered","format":"html"}]},"author":1,"featured_media":2366,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[10],"tags":[],"class_list":["post-156","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-cash-flow-forecasting-automation"],"acf":[],"gt_translate_keys":[{"key":"link","format":"url"}],"_links":{"self":[{"href":"https:\/\/www.emagia.com\/blog\/wp-json\/wp\/v2\/posts\/156","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.emagia.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.emagia.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.emagia.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.emagia.com\/blog\/wp-json\/wp\/v2\/comments?post=156"}],"version-history":[{"count":0,"href":"https:\/\/www.emagia.com\/blog\/wp-json\/wp\/v2\/posts\/156\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.emagia.com\/blog\/wp-json\/wp\/v2\/media\/2366"}],"wp:attachment":[{"href":"https:\/\/www.emagia.com\/blog\/wp-json\/wp\/v2\/media?parent=156"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.emagia.com\/blog\/wp-json\/wp\/v2\/categories?post=156"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.emagia.com\/blog\/wp-json\/wp\/v2\/tags?post=156"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}