Hot on Cash forecasting

5 Expensive Myths in Cash Forecasting

September 24th, 2015

Myth 1: Cash forecasting should be tied to an ERP Project

Especially big corporations tend to think that the company should complete a wide-ranging ERP project before it is worth considering developing cash forecasting. Sure: a single source to collect all or most of the required information makes cash forecasting easier.

Nevertheless,

an ERP project is a lousy excuse not to develop cash forecasting right now.

ERP initiatives can often take years and the requirements for cash forecasting are rarely a high priority. If you neglect developing cash forecasting during this time, you can be sure your company loses massive amounts of money.

ERP initiatives can often take years and the requirements for cash forecasting are rarely a high priority

The myth was born because it used to be very difficult to integrate systems and integration required the already over-burdened IT department to participate in the integration work.

Nowadays, the situation is very different. If you use a modern, cloud-based cash forecasting solution, you can build the integrations to dozens of systems (if you wish) easily and on your own.

Myth 2: Cash forecasting is not worth doing unless it is accurate

Some companies neglect to develop cash forecasting by claiming that in their line of business accurate forecasts are impossible to make. The usual reasons are:

  • Subsidiaries are not able to forecast their cash flows
  • Incoming payments cannot be forecasted as customers never pay on time
  • Outgoing payments cannot be forecasted as the invoices are stuck in the approvals cycle

These are all factors to be considered when developing cash forecasting.

Subsidiaries will get better at forecasting with good working instructions and understanding why reliable cash forecasting is important for the company.

With incoming and outgoing payments it should be taken into account that the information from AP and AR systems is not always reliable. I have earlier written about how you can improve the forecasting of both incoming [link] and outgoing payments [link].

Even a small improvement in cash forecasting can save significant sums for your company.

Myth 3: Developing cash forecasting is an IT Project

This myth is related to the ERP myth at the top of the list. Companies have developed a wrongheaded notion that all initiative with a software component must be IT projects. Because of this, many consider the procurement and deployment of a simple system, such as cash forecasting, an IT project. This attitude is totally wrong for two reasons.

First of all, the application itself is just a small part of developing cash forecasting. It is much more important to create internal processes and readiness to create reliable cash forecasts. This entails e.g. creating a project plan, selling the project to the top management [link], selling the project to the subsidiaries [link], and giving the subsidiaries good instructions.

You don’t need to involve the IT department to start using a modern cloud solution.

Secondly, cloud services have changed the software market beyond recognition. Modern SaaS (or cloud, if you will) applications are highly scalable and their deployment and integration into other systems is so easy you can do it all without involving the IT department. I recently wrote more on this subject in Cash Forecasting is NOT an IT project.

Myth 4: Excel is a cash forecasting tool

Some companies think that using Excel for cash forecasting saves them money. While it is true, using Excel saves on software license costs, you should consider the cost of all the manual work involved in using Excel. When you consider this, you’ll find out that Excel cannot compete with modern cloud applications even on price.

Flexibility is often considered a strong suit of Excel. Almost every professional can use Excel and it is easy to create your very own formulas with it.

But if you mean the usability of a solution in all situations, Excel falls woefully short. Integration to external systems is challenging and automatic updating of account balances and AP/AR information is simply not going to work with Excel.

After the clever intern who developed the nifty macros and formulas is no longer around, nobody knows how the application generates the numbers.

Any changes done to Excel spreadsheets typically remain undocumented. After the clever intern who developed the nifty macros and formulas is no longer around, nobody knows how the application generates the numbers.

On the other hand, Excel is an excellent tool to be used with a cash forecasting solution. By transferring information from your cash forecast to Excel, you can utilize formulas and macros to create dazzling management reports.

Myth 5: Cash forecasting should be a part of TMS

Some larger companies with a dedicated treasury function believes cash forecasting is a part of their TMS (treasury management system). This is likely due to the treasury not having real experience and expertise from software and its procurement.

They might also suffer from the one-stop-shop syndrome [link]. This means they imagine they will get a better cash forecasting solution at a better price by acquiring it from the same source as the other Treasury solutions, i.e. their TMS vendor.

However, a TMS rarely offers the best alternative for developing cash forecasting. A TMS does include cash flows tied to financing instruments but their forecastability is not an issue as they will certainly be realized on due dates.

A TMS does include cash flows tied to financing instruments but their forecastability is not an issue.

The problem domain of cash forecasting is to get the operative cash flows of the business under comprehensive monitoring. The solution must enable the collection of data from dozens of different systems, offer tools for improving forecastability, and especially make cash forecasting as easy as possible for subsidiaries. A TMS vendor rarely has the expertise to do all this.

An exception to this rule are those TMS vendors who offer a specialized cash forecasting solution from a third party as an add-on part of their solution. This benefits both the customers and the TMS vendor, as developing a cash forecasting solutions requires a different set of capabilities than what a TMS vendor typically has. This way the TMS vendor can concentrate on its core competencies and yet offer a comprehensive cash forecasting solution to its customers.

Unreliable or non-existent cash forecasting is expensive to your company. Believing in these myths can delay the development of cash forecasting or impact its quality. By busting the myths, you will be much better prepared to quickly develop your cash forecasting to a new level.