more-arw search

Q&A Forum

Cash Flow Forecasting - Most Common Mistakes?

cash flow forecastingWhat Are the Most Common Mistakes in Cash Forecasting?>


Topic Expert
Michael Hunstad
Title: Senior Strategist
(Senior Strategist, ) |

The three most common mistakes in cash flow forecasting might be:


Cash flow forecasting is a major undertaking and should be viewed as a key strategic treasury initiative. As such, it should be allocated sufficient first-tier resources. Too often I’ve seen cash forecasting relegated to junior level staff who don’t have an adequate understanding of the organization or to an already-overloaded senior staff member who doesn’t have sufficient time to devote to the cash forecasting exercise. From much experience I’ve learned that a half-hearted attempt at cash flow forecasting can often be worse than no attempt at all.

In a similar vein, the cash forecasting initiative should have the full support of C-level management. If it does not then it is almost inevitable that forecasting will eventually be pushed to the back burner where it will stagnate and ultimately lead to inaccurate and unreliable results. Having the “buy-in” of senior management will protect the process and ensure that it is not usurped by other projects.

Operating in a vacuum

In theory, cash flow forecasting should be simple – the company controls what cash goes out the door and, at least on an organizational level, we should have a fair understanding of how and when our customers pay us. However, this doesn’t often translate into accurate cash projections. While it is probably true that someone, somewhere in the organization has foreknowledge of specific cash flows the channels for communicating that information are not developed. For example, an account rep. in Texas may have known that one of his customers was paying late because of a dispute over item counts but this information may not have made its way to Treasury.

Developing these communication channels, then, is a key function of the treasury group and an essential component of the cash forecasting process. The cash forecaster’s job is to understand the financial supply chain of the organization, develop contacts at key nodes of that supply chain that will inform him/her of significant cash flow events and integrate that knowledge into a formal cash forecasting model. A cash forecaster who operates in a vacuum without outside knowledge is doomed to fail.


If a cash forecast is a nexus of information sourced throughout the company there must be incentives in place for contributors to provide this data both accurately and on a timely basis. Unfortunately, this is rarely the case. For our account rep. in Texas, communicating cash flow information to Treasury is probably last on his priority list. However, this doesn’t have to be the case. Adequately incented, information can and will flow through the organization and reach the cash forecaster in time to be effective.

Topic Expert
David OBrien
Title: Treasury Consultant
Company: EE Treasury
(Treasury Consultant, EE Treasury) |

Dear All:

Success in Cash Flow Forecasting is dependent upon:
**Understanding the business: Map and understand: AR, AP, Inventory processes
**Controlling cash, understanding the relationship between Working Capital and cash
**Understanding the Statement of Cash Flows

End of the day you have to understand these key attributes prior to any attempt to forecast.

Direct problem areas:
**Failure to clearly define objectives, tenor, line items under forecast, distribution group.

Success in the 95% range over 3 months is possible applying a top down direct method that links Working Capital to Cash to Cash Flow Forecast.

David L. O'Brien

Michael Jameson
Title: VP Finance
Company: Undisclosed
(VP Finance, Undisclosed) |

Does your company sell small transactions to a large number of customers, or large transactions to a small number? If you have a few payers from whom you derive a large % of your incoming cash, it pays to know their behaviors. Not knowing them, and using generic assumptions in your models, will lead to significant variances. For instance, if some of your top customers are publicly traded, knowing when their quarter ends may be handy knowledge for your forecast.

On the payables side, the same general pricinple holds: know thyself. Where can you delay payment and where can't you. Are you going to drive to improve payments to vendors so that you can ask them favors down the road? what is your payments strategy? Thinking about this ahead of time leads to better forecasting.

Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

Understanding accounts receivable and accounts payable patterns is very important, but mistakes arise from not considering adequately the difference in timing of expense recognition and cash payment for items like interest on debt, payments to benefit plans trusts, and payments for insurance coverage. A good understanding of the working capital requirements of changes in business volume or produt mix is also very important.

D. Hill Rose
Title: independent consultant
(independent consultant, ) |

Fully centralize cash, meaning have corporate-wide cash flows funneled to/from ONE central account. This should give you -- literally -- perfect historical info for available funds with little effort. Use this info as the basis for forecasting available funds out to 90 days, especially the essential next day forecast. Improve the forecast with estimated A/P and A/R info on estimated clearings/collections.

For beyond 90 days you can either extend the forecast based on historical available funds. Perhaps better, use cash forecast information that's included as part of the planning info for the year; just adjust it as much as you can for derived cash flow components that need to be adjusted for reality (such as sales commissions as a percentage of sales).

Topic Expert
Randy Miller
Title: Partner
Company: CFO Edge
(Partner, CFO Edge) |

This works if your company is locally or regionally based, but for multi-state operations you may need to use multiple banks depending on the coverage in the area of operations. Also, I believe in segregating payroll and other special purpose accounts where outside parties (taxing agencies, payroll services, etc.) may require direct access to the accounts. This helps keep the company from spending tax deposits and eliminates nasty surprises in the operating account when a draft comes out a day or two earlier than expected.

D. Hill Rose
Title: independent consultant
(independent consultant, ) |

Randy, thanks for the comment. To explain myself better, you can readily concentrate all U.S. cash flows to ONE bank account even if you have a number of different subsidiaries. Use "collection only" and "disbursement only" bank accounts to directly funnel funds to/from the single commingled corporate-wide bank concentration account. Electronic DTC's lets the funds be concentrated from outlying accounts nearly automatically. Use an in-house bank setup to keep track of each subsidiary's share of the central cash pool.

With the above setup you really do have perfect corporate-wide historical cash flow information that's readily available from one place (the corporate-wide cash concentration account). This "perfect" information gives you a sound basis for making a cash forecast for the next 90 days (and for judging how accurate it was).

Note: I quite agree with your comment on segregating disbursement accounts.

Topic Expert
Brenda Morris
Title: Board of Directors, Audit Committee Chai..
Company: Boot Barn
(Board of Directors, Audit Committee Chair, Boot Barn) |

What tools are you using to make this process less labor intense and less manual? I have looked for a forecasting tool for years and have not found one that seems comprehensive. Is excel the only/best answer?

Topic Expert
Henry Schumann
Title: Manager FP&A
Company: Allscripts
(Manager FP&A, Allscripts) |

At a previous employer, we installed Hyperion Strategic Finance (HSF) and I was very happy with it producing a complete set of financial statement forecasts which included a statement of cash flows.

Jill Lohr
Title: Assistant Treasurer
Company: Lear Corporation
(Assistant Treasurer, Lear Corporation) |

Exidio Trezone

Topic Expert
David OBrien
Title: Treasury Consultant
Company: EE Treasury
(Treasury Consultant, EE Treasury) |


By my experience in global cash forecasting a both an At as well as a consultant, you can reduce the cash forecasting effort by:
*Ensuring that the independant data is captured in the cash forecasting tool as a by-product of underlying cash and financial statment activity;
*Use "smart" forecast algorithms to rationalize the data;
*Ensure mandatory updating to Treasury of forecast information from relavant departments
*Use corporate intranet panels to communicate data

Best wishes....................

David L. O'Brien, CTP

Topic Expert
Joan Varrone
Title: CFO
Company: Cloud Cruiser
LinkedIn Profile
(CFO, Cloud Cruiser) |

If you do not have cash reserves it is important to develope a weekly/daily cash forecast. I have seen a company get in trouble by relying on a month end figure while ignoring the cash flow requirement spikes shen payroll hits (which was their largest expenditure). If you have sufficient reserves this is not necessary.


Topic Expert
David OBrien
Title: Treasury Consultant
Company: EE Treasury
(Treasury Consultant, EE Treasury) |

Dear All:

I suggest that regardless of the firms' cash position, due attention to cash forecasting is a criticall activity.

David L. O'Brien, CTP

Paul Johnson
Title: Consultant
Company: The Business Trek
LinkedIn Profile
(Consultant, The Business Trek) |

How frequently should a cash forecast be regenerated? We currently project daily cash based on frequent updates of expected outflows but only recast the weekly collections inflows on a monthly cycle. Thanks for providing some benchmarks based on your firm's practice.



Get Free Membership

By signing up, you will receive emails from Proformative regarding Proformative programs, events, community news and activity. You can withdraw your consent at any time. Contact Us.

Business Exchange

Browse the Business Exchange to find information, resources and peer reviews to help you select the right solution for your business.

Learn more

Contribute to Community

If you’re interested in learning more about contributing to your Proformative community, we have many ways for you to get involved. Please email [email protected] to learn more about becoming a speaker or contributing to the blogs/Q&A Forum.