Advantages of Bottom Up Cash Forecasting

Bottom up cash flow forecasting is very cumbersome to implement. And therefore very few corporates do. So far we have only found one reason to do it and that is severe external pressure from investors and banks during a period of extreme cash constraints. The pressure would consist of requirements of cash flow forecasts with such depth and detail that only a bottom up forecasting model could produce. Interestingly, our research has concluded that even after such companies have returned to profitability and sound finances they did choose to keep and develop the bottom up forecasting.

Cash forecasting improves the management of liquidity. Pooling of excess cash to accounts where the treasury department has access to the funds will enhance its abilities to act on short term cash deficits in other parts of the organization or invest the funds if not needed anywhere else. Medium to long term forecasting allows the cash manager to find ways to (i) maximize interest earnings by investing the available funds in investments with higher yields then usually received on ordinary bank accounts.

Cash forecasting enhances the company’s possibilities to (ii) determine the ability to generate future cash. If the cash manager is able to predict future cash inflows, as well as outflows, it enables pro-active actions.

Optimize the usage of available funds in the company for (iii) lowering the costs of funding.

Companies may be required to supply forecasts to its lenders (iv) to meet and manage financial obligations like loan covenants.

If cash flows are known in advance the (v) capital budgeting process is facilitated. Companies can optimize their investment activities to periods when funds are available.

Cash forecasting can be used as a tool to (vi) evaluate working capital initiatives. If e.g. the trend is that customers are delaying their payments for goods sold, management can take actions to improve the payment process.

There are several other benefits of a bottom up cash forecast. The turbulent markets and deleveraging will definitely make it well worth to implement because the cash constraints will not go away anytime soon.