The future of cash forecasting. (Selected Topic).(business financial management data)(Brief Article)

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.