Essential Tools and Techniques for Cash Flow Forecasting 

Too often, inaccurate cash flow forecasting prevents a company from making confident decisions. Whether considering a potential investment or optimizing loan repayments, treasurers are stuck without real-time cash flow data.   

Inaccurate data can result from outdated and manual cash forecasting processes. Analysts can make too many assumptions about current cash positions and capital structures, forcing companies to repeat the same manual tasks.   

A C-Suite survey discovered that nearly all respondents (98%) want to be more confident about their cash visibility. This is why accurate cash flow forecasting is crucial. It allows you to make strategic decisions and prevents you from holding on to idle cash that could have been invested elsewhere. Additionally, it helps your operations become more transparent so you can avoid audit failures and other regulatory risks.  

It’s equally crucial to know the methods and tools available for cash flow forecasting so you can choose the best solution for your business. With the right systems, you can confidently explain your data to stakeholders and quickly take advantage of market opportunities. 

5 Essential Cash Flow Forecasting Techniques

Knowing how to conduct your cash forecasting depends on your end goals and the type of business you have. Are you looking at short-term insights? Or would you prefer long-term analysis or even exploring future scenarios?  

With these in mind, here are some of the essential methods to consider: 

1. Direct Method

Direct forecasting focuses on short-term, transaction-level analysis within a specific period (daily, weekly, or monthly). You gather all your receipts and disbursement records (outflows) and payments or invoices (inflows) to calculate how much cash you have within that period. These numbers can include revenue, expenses, funding, and debt repayments.  

This granular approach relies heavily on present transactions and can give you detailed cash visibility. However, it can be time-consuming since it would require continuous real-time data collection. Plus, if this is manually done, it can be prone to errors. 

2. Indirect Method

Indirect forecasting incorporates non-cash components, such as asset depreciation or amortization. This method is best for long-term insights and guidance because it analyzes past financial performance to make informed predictions. It’s also great for budgeting because it takes external factors into consideration. 

Below are three common methods under indirect cash flow forecasting.  

• The Adjusted Net Income Method (ANI) involves examining past operating income while factoring in account payables and receivables. 

• The Pro Forma Balance Sheet Method (PBS) analyzes both historical and future balance sheet cash accounts. 

• The Accrual Reversal Method combines ANI and PBS, using statistical analysis to reverse large accruals. 

3. Three-Way Method

Also known as the Three-Statement Method, this technique combines important statements—Profit and Loss (income statement), Balance Sheet forecasts, and Cash Flow projections—to make one comprehensive forecast. This method is particularly helpful for scenario planning to anticipate answers to what-if situations, including unexpected market slowdowns and expenses.   

4. Bank Data Method

This approach uses a company’s bank statements to analyze cash positions per account and entity. Each transaction category (e.g., credit cards, ACH) is analyzed to calculate estimated changes within these categories. Like the Direct Method, this approach can be time-consuming and labor-intensive. However, having a direct connection to bank application programming interfaces (APIs) (like GTreasury’s ClearConnect) can significantly streamline this process.  

5. Rolling Cash Forecasting

Unlike static forecasts, rolling forecasts extend for up to 18 months. They’re also conducted weekly or monthly instead of annually, making them more responsive and proactive. If a company experiences a drop in sales, having a rolling forecast helps them quickly identify the problem and implement cost-saving measures. This agile method helps organizations maintain their cash and liquidity management.   

3 Essential Cash Flow Forecasting Tools

Now that you know some of the commonly used cash flow forecasting methods, let’s discuss the different tools that can help automate and optimize them. 

1. Treasury and Risk Management Systems (TRMS)

A treasury and risk management system is a comprehensive solution that optimizes treasury functions, including cash flow forecasting. This is accomplished through integrating TRMS platforms with your existing enterprise resource planning (ERP) systems and bank APIs. TRMS software provides real-time cash positioning and visibility, both crucial to generating accurate forecasts.  

GTreasury’s solution can extract real-time transactional data from multiple internal and external sources. You can set slice-and-dice and drill-down analysis for global cash visibility across all your accounts and entities. 

2. Cash Flow Forecasting Software

Part of cash management systems, cash flow forecasting software automates the entire process. You don’t have to worry about manual data gathering and outdated information. These solutions come with various features that can generate accurate reports and analyses within minutes using real-time data. 

For example, GTreasury integrates with financial APIs to quickly import files and populate forecasts for a unified view. It can also run models and apply formulas, like sensitivity and variance analysis, for different scenarios (e.g., sunny- and rainy-day forecasts). You can also compare approved forecasts against cash positions to derive an official forecast and combine multiple forecasts for a holistic view. 

3. Business Intelligence Tools

Tools like Tableau and Microsoft Power BI can analyze and visualize business information, including cash flow forecasting. They can also create dashboards highlighting emerging trends and patterns across your data. The output, including data modeling, can be as straightforward or as complex as you need it to be. However, navigating these tools may have a steep learning curve. 

Conclusion

Effective cash flow forecasting requires a combination of techniques and tools tailored to your company’s needs and goals. GTreasury’s comprehensive solution ensures your data is captured and analyzed in real time for actionable insights. This not only helps your organization manage liquidity and minimize risks, but it also helps you prepare for the future and drive growth.  

Schedule a demo today to explore how GTreasury’s cash flow forecasting software can help you make more strategic decisions. 

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