The Handbook of Global Corporate Treasury

Chapter Ten

Cash Flow Forecasting

FORECASTING OF CASH FLOWS is one of the most underrated yet critical aspects of a company’s operations, and the Treasurer is the vortex of the entire process.

FORECASTING IN THE CONTEXT OF LIQUIDITY MANAGEMENT

The goal of the cash flow forecasting (referred to in this chapter as forecasting) exercise is primarily to increase visibility of the cash and liquidity position of the firm by determining the timing, amount, currency, and location of cash inflows and outflows in advance.

The eventual objective is to determine funding requirements and liquidity usage and planning to ensure minimal borrowings and maximum utilisation of the firm’s cash. This would reduce cost of capital and hence expenses and would increase returns on excess cash.

Strong forecasting also enables a robust risk management process. The core aspect of management of a firm’s risk is to manage its future or expected cash flows and balance sheet positions, which is effectively the forecasted financial value of the firm.

Figure 10.1 depicts the basic forecasting process and its role in liquidity management. The inputs and influencers in the forecasting process are derived from various entities around the world, including business units, procurement units, finance, manufacturing, human resources, and the like. It is very important to keep the teamwork going and to ensure seamless cooperation across these functions.

FIGURE 10.1 Basic Forecasting Process

Figure 10.2 shows the typical ...