Why Traditional Cash Forecasts Aren’t Sufficient


As cash is central to everything an organization does, it’s right that companies devote time and effort to forecasting cash, especially during these times of uncertainty with higher interest rates and inflation. However, over time most organizations have created a Frankenstein of forecast methodologies. Each one made sense at the time and for their own reasons but left most finance teams without a single clear, actionable view of realistic future cash flows.

Some of the common forecast approaches:

  • Liquidity forecasts: The aim is to measure liquidity levels with a specific view toward knowing when they will need to raise capital to fund operational or investment needs.

  • Debt forecasts: These forecasts are generated to show stakeholders that any debt covenants are being managed and any loan repayments are on schedule.

  • Working capital forecasts: Commonly created to give the board and/or investors visibility into finance’s performance against budgeted expectations and to indicate operating efficiency.

Standard liquidity forecasts are generally proactive, with forecasts built using transaction data from banks and internal sources. Forecasts designed to manage investor relations tend to be more reactive, relying on retrospective data from published financial statements.

Unfortunately, from a holistic standpoint, the techniques above suffer from a lack of immediacy. Liquidity forecasts are often too cumbersome to provide real-time insight. And forecasts for investors are more of a reporting tool than an aid to improved decision-making. It means that too many companies are making decisions on forecasts that are not much more than an extrapolation of historical data. Moreover, developing multiple forecasts is time-consuming and inefficient.

Looking Ahead

Finance needs to be able to act on a forecast for it to be meaningful, whether that is to maximize liquidity or to ensure a key metric is met. That means getting smarter about how forecasts are created and leveraging tools like machine learning and AI to identify trends in cash performance.

For Carlos Vega, Tesorio’s founder, actionable forecasts are key. “People want a real-time forecast that shows what is happening and allows the company to take action, whatever the reason for forecasting,” he explains. “As an example, if you are considering paying off a debt early (this month, rather than next fiscal quarter), you need a proactive forecast.” Finance needs to see the impact on cash before making any decision, and only a proactive forecast, updated in real-time, provides that necessary insight.

More generally, finance requires visibility to cash to make effective decisions. For each cash flow, “the gap between the expense or income and the actual cash event is hard to keep track of, but has real implications for how you run your business,” explains Vega. “Having automated accounts receivable forecasts for you as a CFO and the finance team is really impactful. It helps finance understand what is happening across the business, and that information then helps drive other decisions in other teams.”

And, critically, automation means a company only needs one forecasting process, improving visibility and enhancing efficiency at a stroke.

Learn More

To learn more about modernized cash forecasting, check out this blog here and learn more about the benefits and functionality of Tesorio’s AR forecast. If your organization is ready for a finance transformation with AR automation, contact Tesorio today.