A Crystal ball for cash flow forecasts.

• Author: Corbett, Jacqueline
• Position: Treasury

The complex and sometimes arcane art of cash flow management used to be a relatively passive affair, as treasury departments were charged simply with managing and balancing the numbers. However, such departments are now becoming more active partners in creating value with the capital they track, and helping steer it into more efficient and profitable channels. One way in which this is achieved is through more active cash flow forecasting.

In order to assess current trends in cash flow forecasting, Thomson Financial conducted an anonymous online survey of 75 companies. Respondents encompassed a broad range of market capitalizations, sectors and complexity within treasury operations. The survey results provided a fascinating overview of the obstacles that prevent accurate cash flow forecasts at many companies, and how companies are addressing those obstacles.

At the highest level, the study confirmed that nearly all respondents produce cash flow forecasts, and within their firms, those forecasts are widely utilized and valued by senior management. A treasury workstation is the most common way that companies create their forecasts, with manually populated spreadsheets close behind.

But, how accurate are cash flow forecasts? In general, the longer the time frame covered in the forecast, the less satisfied financial professionals are with the accuracy. When asked about daily forecasts, 90 percent of respondents said they were satisfied with the level of accuracy; for yearly forecasts, satisfaction drops to 40 percent.

Further, when asked about the variance between actual and forecast daily cash flow, one fifth of financial professionals simply did not know the accuracy of their daily forecasts.

While these numbers may be surprising, it is encouraging to see that on the other side, 30 percent of respondents reported having less than 5 percent variance and a majority (56 percent) cited a daily variance of less than 10 percent, making this a reasonable benchmark for most treasury officers to target.

Bad Data Remains a Problem

So, what exactly prevents so many companies from achieving accurate cash flow forecasts? In a nutshell, bad data.

According to a large majority (80 percent), unreliable or irregular incoming data is the single greatest obstacle to accuracy. Many professionals simply are not happy with the information they receive from their business units. This may be since most reports are delivered to financial professionals verbally (45...