• Register
Return to: Home > Comments > How to design a cash flow forecasting model

How to design a cash flow forecasting model

Corporate treasury departments rely heavily on cash flow forecasts. Cash forecasts are vital for ensuring that a company has enough cash in its reserves to cover any required outgoings. The forecast also supports key strategic decisions, from M&A to investment planning. As such, companies are increasingly looking to improve, or completely rebuild, their cash forecasting processes.

One of the first steps in setting up a new cash flow forecasting process is designing a forecasting model.

If the forecasting model is well-designed from the outset it can drastically improve the quality of reporting outputs, thereby helping to achieve overall business objectives. However, it must be noted that there is not a universal solution. Well-designed, is this instance, means perfectly tailored to the precise business objectives identified at the outset.

Below is a high-level view of the key steps that can be taken to ensure this stage of the cash forecasting process is built well and fit-for-purpose.

Design the model outline upfront

A forecasting model is the reporting structure and associated logic that produces the required forecast output. A forecast model has two dimensions and typically collects two types of cash flow data.

The image below is a simplified version of a typical forecasting model:

The two dimensions of a forecasting model are:

1.       Reporting periods – these might be daily, weekly, or monthly depending on the forecasting horizon and granularity.

2.       Cashflow classifications – these typically group cash flows to a “management reporting” level of detail. Depending on the needs of the business these could be more granular, e.g. receipts could be categorised at a customer level.

The two types of cash flow data in the model are:

1.       Actual data.

2.       Forecast data.

Choosing the right granularity and forecast horizon

When choosing the level of granularity for both the reporting periods and cashflow classifications it is important to strike a balance that meets business objectives. This means not getting bogged down in more detail than is needed, while at the same time not taking a view that’s too broad to highlight important data points.

To assist those currently deciding on the appropriate time horizon for their cash forecasting process, CashAnalytics are in the process of releasing a short series of articles which maps objectives to horizons. The first explores the practical applications for the 13-week cash flow forecast, and the second does the same for a daily cash flow forecast.

The table below includes some illustrative business objectives. It suggests which forecast horizon, reporting date granularity, cashflow classifications, and frequency of creation would be suitable for each.

The key point is that the structure of the model chosen must be able produce the range of reporting outputs needed to meet the business objectives.

Including actual data

Actual cash data allows the forecast model to produce both trend and variance analysis which strengthens the process by providing supplementary analysis capabilities to the base forecast.

As was the case with the granularity decisions, choosing how much actual data to include will depend on the business objectives.

About CashAnalytics

CashAnalytics has helped many companies across a broad range of industries to build and maintain best-in-class cash forecasting processes that produce the highest quality reporting and analytics outputs.

Our flagship cash flow forecasting software provides dashboards, status reports and forecasts, where data is presented with an intuitive interface. You can see real-time cash positions from across the entire business while a suite of analytics tools helps uncover insights in your data that improve decision making.

If you would like to see a demonstration of how software and data visualisation can improve your forecasting processes, please contact us directly.

www.cashanalytics.com

Top Content

    The UK: uncertain waves rule Britannia

    he UK’s accountancy profession is currently in a period of much uncertainty. The Competition and Markets Authority (CMA) has released its review into the listed audit market which could cause the biggest shake-up the profession has seen in years, the Kingman Review has described the Financial Reporting Council (FRC) as not being fit for purpose and called for it to be replaced. All the while the country remains in a deadlock on Brexit negotiations.

    read more

    Views from the Eurozone

    With Brexit looming, populist governments gaining footholds in a number of countries and movements such as the Yellow Jacket protests in France, 2018 was anything but a quite year for the eurozone. Here leaders report to the IAB on their markets.

    read more

    Eastern promise and how to find it

    With China rising as a global power, Jonathan Minter spoke with ShineWing’s Zhang Ke and Marco Carlei at the World Congress of Accountants 2018 in Sydney, to discuss the cultural challenges that occur when Chinese networks look beyond their border, and the dividends available for those who overcome them.

    read more

    Spain: looking to widen demand

    As Spanish accounting professionals prepare for new audit regulations, the Paul Golden asks what they need to do individually and at firm level to maintain and increase demand for their services.

    read more
Privacy Policy

We have updated our privacy policy. In the latest update it explains what cookies are and how we use them on our site. To learn more about cookies and their benefits, please view our privacy policy. Please be aware that parts of this site will not function correctly if you disable cookies. By continuing to use this site, you consent to our use of cookies in accordance with our privacy policy unless you have disabled them.