Effective cash management and forecasting is vital to any organization for several key reasons, including effective liquidity and risk management. Most treasurers understand the importance of timely and accurate cash forecasting — even if they are not always able to achieve them — but do their CFOs?
Many senior financial executives accept cash management and forecasting provided by treasury at face value. However, here are 5 consequences for CFOs who are not deeply engaged in ensuring accurate cash forecasting on a global basis.
1. Making poor business decisions that negatively affect business performance
Having a clear view of the company’s true cash position is essential to making business decisions, from day-to-day changes in staffing levels to long-term commitments like dividend policy and stock buy-back plans. Speed is of the essence — and the sooner the CFO has visibility into the company’s true cash position, the faster they can begin executing their plans. Conversely, problems can arise when that insight is delayed. If the CFO does not fully understand the business performance, or if the cash flow forecast is based on old information, they may lose important time to execute their plans. Untimely data can therefore have an adverse effect on performance.
2. Failing to manage financial risk effectively and transparently
Managing financial risk is a major concern for CFOs. A company’s FX hedging strategy can have a positive impact on the bottom line — but equally, there is a risk that the company’s hedging decisions could result in a negative impact. CFOs therefore need easy access to the relevant data so they can manage financial risks as effectively and transparently as possible. Clear and accurate data also provide CFOs with the tools they need to explain the rationale for their hedging decisions to their peers and to the board to gain the necessary buy-in. Finally, it enables them to report on the effectiveness of the company’s current hedging strategy.
3. Incurring higher funding costs than necessary
Cash positioning and cash flow forecasting play an essential role in determining the company’s current and future funding needs, which is crucial given the CFO’s role in overseeing the company’s capital structure. Arranging access to too little credit can be dangerous — but equally, arranging a larger line of credit than the company actually needs can result in higher costs than necessary, even if that line of credit is never used. With a clear view of current cash balances and future cash flows, CFOs are better placed to limit their need for external funding and thereby reduce their funding costs.
4. Delaying investment opportunities due to a lack of confidence
Issues can arise if the cash flow forecast does not have a good track record where accuracy is concerned, as this can hinder the company’s investment plans. For example, the CFO and CEO may wish to invest in an opportunity such as a talent development project — but to pay for the project, the company may briefly need to access a line of credit, which will then be repaid once the company has received a payment due from a customer next month. If the cash flow forecast has a track record of being accurate, the CFO may get the go-ahead to make the investment. But conversely, if confidence in the cash flow forecast is lacking, the CEO may need to delay these plans.
5. Poor operational efficiency
Finally, a lack of clear visibility into the company’s cash position can hinder the CFO’s ability to monitor how well specific operational initiatives are progressing. For example, the company may have decided that one of its operations needs to downsize. As a result, the size of the payroll is expected to decrease from $5 million to $3.5 million over a defined period. With clear visibility, the CFO can monitor whether the project is on track – but without sufficient visibility, the CFO may lack insight into the speed of execution and may miss the opportunity to intervene on a timely basis.
CFOs and treasurers can gain real-time cash forecasting through a cloud-based treasury management system (TMS). These systems make it possible to get global cash visibility, as well as advanced forecasting so CFOs and their teams can increase agility and maximize decision making.