Cash Flow Forecasting: A Critical Tool for Corporate Success

Effective management of cash is a crucial aspect of corporate finance, as it allows corporations to maximise returns while maintaining an adequate level of liquidity. One way to achieve this is through cash consolidation, forecasting and efficient liquidity management. Cash flow forecasting is a vital aspect of financial management that enables businesses to anticipate their liquidity position over the short and long term. It involves analysing historical bank account data, accounting accruals, sales forecasts and anticipated expenses to create a projection of cash flows and balances, that inform important financial decisions.

Hence access to readily available real-time data about the company’s cash positions is critical to achieving liquidity management objectives. Similarly translating such information into an efficient forecasting model (manual or digital) is key to help management make investment and funding decisions.

Cash flow forecasting is a critical tool for corporate success, as it can help businesses to:

• plan for future growth and expansion
• identify potential cash flow problems
• make informed financial decisions
• secure financing for the business

Poor quality forecasts result in increased liquidity risks, costs, and reduced income while on the other hand a well-prepared cash flow forecast can provide businesses with a clear picture of their financial health and help them to make better decisions about how to allocate their resources.

There are many benefits to cash flow forecasting, including:

• Increased financial visibility: A cash flow forecast can help businesses to track their cash inflows and outflows specially via an online automated cash flow tool that can provide this info in real time. This can help them to identify potential cash flow problems early on and take corrective action.
• Improved decision-making: A cash flow forecast can provide businesses with the information they need to make better financial decisions. For example, a business may use a cash flow forecast to decide whether to invest in new equipment or expand into new markets.
• Increased access to financing: Lenders are more likely to lend money to businesses that have a well-prepared cash flow forecast. This is because a cash flow forecast can help lenders to assess the risk of lending money to a business.
• Reduced risk of cash flow problems: A cash flow forecast can help businesses to identify potential cash flow problems early on and take corrective action. This can help to reduce the risk of the business experiencing a cash flow crisis.
• Better planning for growth: A cash flow forecast can help businesses to plan for future growth and expansion. This can help to ensure that the business has the necessary cash flow to support its growth plans.

Digital cash flow forecasting solutions offer several benefits over manual cash flow forecasting processes. These benefits include

• increased accuracy
• reduced time and effort
• improved collaboration
• enhanced flexibility
• better visibility of information
• access to various online reports and variance analysis
• scalable and flexible models which can seamlessly adjust to changes in business needs and market dynamics

Below are some additional considerations when choosing between a digital cash flow forecasting solution and a manual cash flow forecasting process:

• The size and complexity of the business: Digital cash flow forecasting solutions are typically more suitable for medium to larger and more complex businesses. This is because these solutions can handle more data and can be more easily customised.
• The budget: Some Treasury Management Systems (TMS) with cash flow forecasting module can be more costly with longer implementation timelines versus recent developments in this area as alternative solutions offered by Banks i.e. HSBC’s Online Cash Flow Forecasting tool that is easy to implement as well as cost effective providing benefits such as quick implementation, increased accuracy and reduced time and effort versus manual cash flow processing.
• Automating forecasts using historical data and modeling tools: Use of calculation models (i.e. % growth, smoothing, trend line extension while using historical data) with configurable parameters and lookback periods like HSBC’s Forecasting tool
• The level of expertise: Digital cash flow forecasting solutions require some level of expertise to use. However, there are many resources available to help businesses learn how to use these solutions and take advantage of such new advancements.

Businesses that are considering using a cash flow forecasting solution may want to contemplate on the below suggested recommendations:

• Start with a manual cash flow forecast to get a basic understanding of your cash flow needs
• Once you have a basic understanding of your cash flow needs, you can consider using a digital cash flow forecasting solution
• When choosing a digital cash flow forecasting solution, consider the size and complexity of your business, your budget, and your level of expertise
• Make sure that the digital cash flow forecasting solution you choose is easy to use and that it provides the features you need together with the support model available to you and your business

Cash flow forecasting is a critical tool for corporate success. A well-prepared cash flow forecast can be a valuable tool for improving financial visibility, making better financial decisions, and reducing the risk of future cash flow problems.

By considering some of the key discussion points in this article, businesses can improve their cash flow forecasting process and ponder whether a digital cash flow forecasting solution could be suitable for them.

If you would like to consider HSBC’s Online Cash Flow Forecasting tool, please contact your HSBC representative

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