Five tips for cash flow forecasting in uncertain times

Businesses need insights into their cash flow and liquidity now more than ever as they deal with the wide implications of COVID-19. Social distancing measures have caused massive disruptions to supply chains in Australia and worldwide. As a result, many businesses have faced delays in their accounts receivables, putting a lot of pressure on their working capital as their accounts payable obligations remain unchanged.

With so much disruption, you need a ready view of your likely future cash positions under a range of possible scenarios. Remember that you cannot manage what you cannot measure, so it is vital to forecast your cash flow, to know how much cash and working capital your company will need to navigate the way forward. The goal is not just to survive, but to help ensure the business’s long-term stability and support its future growth.

Dynamic cash flow forecasting, backed by technology such as HSBC’s Liquidity Management Portal (LMP), can be a catalyst for your company’s financial security. By having visibility of your cash position, you can plan ahead and prepare for potential issues in your business. In particular, good cash flow forecasts will enable you to proactively decide on your working capital, investments, funding and business operations.

In this article, we discuss how you can effectively forecast your cash flow in times of disruption.

Forecasting accurately

Projecting cash flow can be complex. You need a good grip on the different operational parts of the business and must consider many variables to understand how much cash you will have against the amount you will need.

In the past, it was enough to forecast cash flow in arrears every month using an Excel spreadsheet. But as corporates forecast on a shorter time horizon, getting timely data from businesses in multiple locations has become more challenging.

Here are key considerations to help you forecast accurately.

1. Start with quality input data

   Your forecast is only as good as the information you have, so start by identifying diverse data sources. Have access to data points across all business units to capture expected receipts and payments, and inflows from non-operating business activities such as dividends and asset sale proceeds.

   Also consider potential risks to these inflows. If your company deals with multiple currencies, it is wise to factor in foreign exchange risk in your projection.

2. Encourage organisational buy-in

   Having a culture that values the importance of cash flow forecasting is vital. Without organisational support, cash flow forecasts may become inaccurate and consequently less valuable to decision making. The key is to get genuine input and buy-in from all business units. Work with key leaders to ensure people own and are accountable for the different parts of your forecasting processes.

   Senior management support is also key. Often, a company with a strong cash culture has senior managers who advocate robust cash flow and working capital management. They help build organisational dynamics that ensure the company pays enough attention to cash flow forecasting.

3. Leverage technology

   You need technology to aggregate data for your forecast. In this period of unpredictability, it is crucial to get information in real time and automate data collection. This will speed up forecasting and minimise errors, ultimately improving confidence in your forecast.

   Software tools can help you achieve this – choose one that is flexible, easy to use and highly automated. But keep in mind that it is still your processes and governance for collecting information that will dictate the quality of your forecast.

   To get a forward-looking view of their cash positions, many corporates are exploring the use of artificial intelligence. Techniques that employ machine learning take your historical data as a basis for a forecast, but extrapolate your cash information to provide a more insightful and accurate projection.

4. Forecast for different time horizons and build multiple scenarios

   When conditions are changing quickly, most organisations focus on short-term forecasts to guide urgent decisions. But it’s wise to also maintain medium- and long-term views of your cash position to make sure your business can deliver on its strategies.

   Consider creating several scenarios for how your company’s cash position would look under various short- and medium-term scenarios. This will enable the business to plan ahead and take decisive actions, such as adjusting its processes or getting additional funding.

   As economic conditions change, remember to keep your modelling simple so you can quickly modify what-if scenarios.

5. Publish and monitor your forecast

   Share key insights from the cash flow forecast with key team members across the organisation so business leaders and managers can use them in decision making. This will encourage feedback, which is crucial to improving the overall robustness and accuracy of your cash flow forecasting process.

   Finally, regularly monitor and review your forecast to boost its accuracy. Adjust it against new or better information, including from your actual business performance.

Making forecasting simpler

HSBC knows the difficulty of forecasting in stressed market conditions, so it has made understanding cash positions simpler and more reliable for corporate clients.

The new LMP solution, enabled on HSBCnet, gives you an aggregated view of your available cash globally – in the currency of your choice. Using the LMP dashboard, you can get a real-time view of your cash position across all your banks and products, and drill down from a global view of your company’s aggregated balances to individual accounts. This gives you greater visibility into your liquidity and allows you to easily manage it, saving you time and money.

Now, you can also project your cash flow using the LMP. HSBC’s new forecasting tool lets you project your company’s cash movements so you can see how they will likely affect your liquidity position for any given period.

With HSBC’s cash flow forecasting tool, you can:

• Automatically capture your company’s account and transaction information
• Connect data points across departments and business entities – local and international – reducing the complexity of aggregating data from diverse sources
• Project your cash flow for any time horizon
• Update your cash flow projections to include new information.
• The result is a reliable forecast to help you make informed decisions and emerge from the current uncertainty financially secure and ready to support growth.

Having a partner to navigate today’s challenging environment has never been more important. At HSBC, we are your strategic partner to ensure your business remains resilient. Find out how we can help: