Slippery Cash Flow Forecast – How to Make it

Slippery cash flow forecasts are an often difficult art depending on the frequency of their update, the diversity of sources of information and the choices that the treasurer is made to make (choice of support, horizon, degree of data aggregation, etc.

The Usefulness of Slippery Cash Flow Forecasting

It is triple:

• It is first used to make a financing or investment decision at CT: choice of maturity and amount. The forecast indicates a need to finance or a surplus to invest.
• Ensure the liquidity of the business in the long term. For cash-strapped businesses, the treasurer will ensure that the CT lines of credit are sufficient to ensure expected disbursements over the coming weeks and months. It has defined an action plan allowing falling back below the authorized lines when the forecasts reveal an insufficiency of cash: revival customers, proposal of discount for advance payment, shift of investments, purchase from suppliers proposing a credit more important, etc.
• Manage foreign exchange risk: The foreign exchange position tracking table is a forecast of incoming and outgoing payments by currency at the due date. This table measures the exposure, short or long, of the company in this currency. It is the support to set up and update currency hedges: natural hedging, futures, currency options.

Differences between annual budget of the Treasury and Slippery Forecast

BAT is a fixed 12-month forecast. It is determined from operating, investment and financing budgets at MLT that the treasurer recovers from the management control.

The treasurer converts the posting date movements into collection or disbursement dates and calculates the monthly VAT disbursement. The BAT is essentially used to assess the need for funding for CT for the following year and to negotiate credit lines. It is possibly updated mid-year at the same time as budgets.

In contrast, the rolling forecast is updated at any time, in real time, based on the information the treasurer collects from the financial or operational departments.

While the budget leads to the end of month cash position, borrowing or surplus, the slippery forecast leads to the projected bank balance. After a financing decision, this balance is as close as possible to zero.

The 7 Keys to Build the Sliding Forecast

Unlike the annual cash budget, there is no single, well-defined methodology for developing a rolling cash flow forecast. We have defined seven criteria against which the treasurer must make choices to build his sliding plan.

1. Define the Horizon of the Forecast

• When cash is moderately borrowing or surplus, companies typically limit the rolling forecast horizon to one month. This horizon goes from 3 to 6 months, or even becomes an annual sliding forecast when the cash is largely borrowing or surplus.
• When cash is largely in surplus, the treasurer can place on a longer term to benefit from higher yields (he plays the yield curve).
• When cash is largely borrowed and “tense”, the treasurer has an interest in extending his forecast horizon to anticipate any exceedance of credit lines allowed and give him time to react.

2. Choose the Forecast Medium

The rolling plan is made either directly on the treasury software, when the company has one, or on a spreadsheet. The advantage of the software is to work on a single tool and to be able to enter certain movements directly on their date of expected value. In addition, treasury software offers the possibility of extracting movements and forecast balances to the spreadsheet to form a cash flow report.

Treasury software publishers also offer forecasting software combined with treasury software. The data is entered as an accounting date and converted into a flow by means of burst laws. This software manages the flows related to VAT. Financing / investment decisions are taken from accumulation (actual current balance, future cash flow forecasts).

3. Define a Cumulative Interval of Flows

When the forecast is made directly on the treasury software, it usually combines:

• of movements to date identified value (eg payment of salaries to such date), which are positioned directly in value date,
• And daily movements accumulated over a weekly interval (transfers received, checks issued or received).

When the sliding plan is done on a spreadsheet, no movement is generally recorded on the value date; all movements are positioned on a weekly interval.

4. Combine Flows of different Natures

This is the main feature and difficulty in developing the art of slippery forecasting. Sometimes the treasurer feeds the sliding forecast from a previous year’s flow history. For example, sales forecasts for a retail store are based on sales made in the previous year, possibly adjusted for the year’s sales.

However, most often, the treasurer feeds forecasts by combining data of different natures and therefore from different interlocutors. Below is the example of sales receipt forecasts, they are built from:

• Sales already billed and accounted for (Real status); we only wait for the collection. The information is obtained from the client accounts or the amicable recovery service;
• Customer orders already received but not yet delivered, when the company is working on order book (status Engaged). The date of collection should be defined from the delivery and settlement period. This information will be available from the sales administration, planning … depending on the organization of the company;
• Orders that are expected to be received (Forecast status), obtained most often from commercial services.

To collect non-accountable data, the treasurer creates a real information network; he puts himself in constant contact with:

• Commercial service for sales forecasts;
• The credit manager for collection forecasts;
• The payroll service, for disbursements relating to salaries, social charges, bonuses, balances of any account, etc. ;
• The marketing department, when it is likely to commit very short-term advertising budgets to support sales;
• General services, factory management for energy expenses, etc.

He convinces his various interlocutors to provide him with the most accurate information possible, in real time to ensure the liquidity of the company and improve the financial result.

5. Use Budget Codes

Any entry of a movement on the treasury software assumes the use of a payment support code (transfer, withdrawal, check,). It is also possible to assign to a movement a budget-type code (customer receipts, supplier disbursements, taxes, refunds, etc.).

The budget type codes make it possible, in particular, to calculate the discrepancies between the actual flows and the planned flows in order to refine forecasting techniques, and, if necessary, update the forecasts for the following periods.

6. Select an Account to Position Forecasts

When the treasurer realizes his forecast on the treasury software and his banks are specialized by movement, he usually directly affects the forecasts on the good bank account.

In the absence of specialization of banks by flows, he sometimes creates a “fictional” bank intended solely for forecasting purposes. The balance of this hypothetical bank is then taken into account with the bank balances to define the projected balance of the company.

7. Customize your Forecasts

The treasurer often feels the need to personalize some movements of significant and fluctuating amount in order to facilitate the update of the forecast. For example, a client’s 20% turnover forecast and irregular payment habits will be subject to an individualized collection forecast that can be more easily updated.