Cash Forecasting

Maturity Model
Executive Summary:
Why is Cash Forecasting Important?
In the wake of the last global financial crisis, providing strong and accurate cash flow
management has become a top priority for treasury teams. While methods have been
implemented to improve cash liquidity, effective cash forecasting remains one of the biggest
issues that corporate treasury teams grapple with today.

Treasurers now need to think more than ever about cash forecasting and how that might
help them identify pockets of surplus cash that can be put to better use. This is where the
problem lies. According to a PwC survey, both the CFO and the Treasurer said that cash
forecasting is their top priority and challenging one.

Top Priorities on the CFO’s agenda vs the treasurer’s agenda (weighted ranking)
Number of respondants: CFOs- 222; Treasurers- 185

Cash Flow 100%

Forecasting 100%

100%
Capital Structure
79%

98%
Funding
93%

69%
Currency Risk
92%

68%
Working Capital
45%

CFO’s Agenda Treasurer’s Agenda

Cash forecasting, when performed accurately, enables:

Longer term investing making decisions

Reduced borrowing costs, more effective hedging programmes
Manage daily liquidity to ensure
- shortfalls are covered
- Surpluses are concentrated to earn some yield on excess cash

Cash Forecast Maturity Model | 2

This ebook provides a lot of insights into why organizations are investing in re-engineering
their cash forecasting process and the role of the Treasury in it. It also explores the key pillars
which define the process efficiency and how organizations could leverage the Cash
Forecasting Maturity Model to gauge where they stand and advance in the right direction.
The next section will help you understand the four key focus areas to concentrate on to
achieve best-in-class forecasting.

CONTENTS

Chapter 01 4 Pillars to Focus to Achieve Best in Class Cash Forecasting

1.1. Approach
1.2. Data Gathering
1.3. Modeling
1.4. Variance Analysis

Chapter 02 Understanding the Maturity Model

Chapter 03 Summary

Cash Forecast Maturity Model | 3

CHAPTER 01

4 Pillars to Focus to Achieve Best in Class

Cash Forecasting
There are 4 important components of the cash forecasting process which play a critical role
in making the process faster and more efficient.

CASH FORECASTING

Data Variance
Approach Modeling
Gathering Analysis

Art vs Science The sources and Choose the right Accuracy analysis
methods of modeling tool for across multiple
data gathering each category areas

Approach - Art vs Science - The approach in which the cash forecasting is done defines the
accuracy of the forecasting. So it is important to define and have an approach based on the
type of cash forecasting you do. There are essentially two main types of cash forecasting
methods – direct or indirect.
Direct cash forecasting is a method of forecasting cash flows and balances for short term
liquidity management purposes, typically less than 90 days in duration.

Indirect cash forecasting is often longer term in nature and it relies on various indirect
methods of building up a cash forecast such as using projected balance sheets and income
statements.

Data Gathering -
When creating cash forecasts, treasury must rely upon a number of different sources. This
often involves communicating with multiple departments and staff members internally to
obtain the desired information

If an organization does not communicate well internally, or has an outdated or legacy tech
infrastructure, this part of the process may be one of the most difficult

Cash Forecast Maturity Model | 4

Modeling - Once the treasury team has collected and aggregated all the relevant data, they
may create their forecast
Typically, the treasury has already selected the forecast method before gathering and
collecting data, as the type/amount of data collected will depend on the forecast method
used

Often, the length of time for the forecast plays a significant role in the type of forecast used
The amount of information available for forecasting and the availability of any
applications/solutions will also impact the type of forecast utilized

Variance Analysis -
Variance Analysis involves comparing forecasted cash flows for a given period to the actual
cash flows that occur during that period to identify discrepancies and evaluate the accuracy
of the forecast

This process can help identify shortcomings within the forecast and aid treasury in
improving the accuracy of their forecasts moving forward

Improving the strength of these pillars can go a long way in building reliable cash forecasts.
The following discusses how these are key success factors in building an accurate and
reliable forecast.

The maturity of the cash forecasting process corresponds to the effectiveness of the process
with respect to the four components. The next chapter explores how the cash forecasting
process could be evolved on the four high impact pillars.

Cash Forecast Maturity Model | 5

CHAPTER 02

Understanding the maturity model

1. Laggards - The organization has some process in place but they are inadequate in that
there are many gaps which affect the day to day running of the organization.

2. Proactive Process - The organization has in place process practices that are adequate in
supporting the business under stable circumstances, and enable it to develop but will not be
sufficient in challenging times.

3. Strategic Process - The organization has in place professional practices which enable it
to cope effectively in challenging times and will identify some opportunities to improve its
performance.

4. Best-in-class Process - The organization has processes and practices that are leading
edge and allow it to anticipate both challenges and key opportunities, in order to optimize its
performance.

Proactive Strategic Best-in-Class

Laggards Process Process Process

01 02 03 04

The Stages in Cash Forecasting Maturity Model

Now, let’s understand how the process of cash forecasting is done across organizations.

Cash Forecast Maturity Model | 6

Approach:

1. Laggards - Based on opinions, judgements, experiences from the past. You take last
year’s data, apply basic metrics and use for this year

2. Proactive - A group of collaborative deal between many managers/partners of company,

could use data coming from local controllers to build forecasts

3. Strategic - Top-down forecasting approach, taking in FP&A data, building distribution

rules and building forecasts

4. Best-in-class - Building forecasts bottoms-up from a granular level, costly from a data
acquisition and effort perspective to gather the proper rules

CASH FORECASTING
Laggards Proactive Strategic Best-in-Class

Approach Based on Group of Builds Always builds

judgement, managers top-down bottom-up
opinions, collectively forecasting forecasts to get
intuitions and develop a granular level
emotions forecast visibility

Art vs Science

Subjective Approach Objective Approach

Pillar 1: Approach

Data Gathering:

Laggards - Have a very manual process. Often just utilizing what happened last year, and using
it as a basis of forecast for this year

Proactive - Using the similar process like Laggards, but adding forward looking information,
and using this information to make adjustments to incorporate the changes in trajectory of
operations of the company (current data)

Strategic - Proactive + Using RPA to automate gathering of data from multiple sources.

Best-in-class - Utilizing API for connectivity between systems so that it stays up-to-date
with the current data available and also using forward-looking information from FP&A,
Sales, ERP. No manual effort involved.

Cash Forecast Maturity Model | 7

 CASH FORECASTING
Laggards Proactive Strategic Best-in-Class
Data
Gathering Manual Manual RPA gathers API
data
Repeats last Laggards + Strategic +
year data and forward looking Information is forward looking
update adjustments based on information
current and (FP&A and sales
The sources and historic data forecast)
methods of
data gathering
Manual Automation

Pillar 2: Data Gathering

Modeling:

Laggards - Excel-based global approach for all categories, last year’s actuals is used

Proactive - Averaging-based approach for all categories, past data representing different
periods (1 year, 1 month, etc) is used

Strategic - Models of some categories such as AR and AP are based on due dates which
might be adjusted, for which ERP and bank data is used

Best-in-class - Uses AI for complex categories such as AP and AR, current and past data is used
for forecasts

CASH FORECASTING
Laggards Proactive Strategic Best-in-Class
Modeling
Excel based Averaging Due dates Artificial
global approach based approach (maybe adjusted) Intelligence

Last year’s Previous Open ERP and Current and

actual data is several year’s bank data historic data is
used data is used for utilized for
Choose the right forecast predictions
modeling tool for
each category
Error-prone Error-free

Pillar 3: Modeling

Cash Forecast Maturity Model | 8

Variance Analysis:

Laggards - No/very little variance analysis

Proactive - Performed at global level only, and only done for single duration, difficult to do
multi-duration analysis

Strategic - Performed at entity and cash flow category-level, for single duration only

Best-in-class - Performed at entity, region and cash flow category-level, for multiple durations
(today’s actual vs forecast done 1 month/3 months/6 months ago)

CASH FORECASTING
Laggards Proactive Strategic Best-in-Class
Variance
Analysis No variance Perform at Perform at Perform at
analysis global level entity and cash entity, region and
flow category cash flow
level category level

Single duration Single duration Multiple

Accuracy analysis durations
across multiple
areas
Never Updated Regularly Updated

Pillar 4: Variance Analysis

Cash Forecast Maturity Model | 9

CHAPTER 03

Summary

Maturity Level Laggards Strategic Proactive Best-in-Class

Approach Human-based No scientific Top-down Bottoms-up

Art vs Science judgement approach adopted approach approach

Data Gathering
The sources and Manual Manual RPA API
methods of
data gathering

Modeling
Choose the right Excel based Averaging based Artificial
Due dates
modeling tool for approach approach Intelligence
each category

Perform at entity,
Perform at global Perform at entity
Variance No Variance category, region
level for single or category level
Analysis analysis performed
duration for single duration
level for multiple
durations

Cash Forecast Maturity Model | 10

About HighRadius:
HighRadius is a Fintech enterprise Software-as-a-Service (SaaS) company which leverages
Artificial Intelligence-based Autonomous Systems to help companies automate Accounts
Receivable and Treasury processes. The HighRadius® Integrated Receivables platform
reduces cycle times in your order-to-cash process through automation of receivables and
payments processes across credit, electronic billing and payment processing, cash
application, deductions, and collections. HighRadius® Treasury Management Applications
help teams achieve touchless cash management, accurate cash forecasting and seamless
bank reconciliation. Powered by the Rivana™ Artificial Intelligence Engine and Freeda™
Digital Assistant for order-to-cash teams, HighRadius enables teams to leverage machine
learning to predict future outcomes and automate routine labor-intensive tasks. The
radiusOne™ B2B payment network allows suppliers to digitally connect with buyers, closing
the loop from supplier receivable processes to buyer payable processes.

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for receivables & treasury

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