To the question of whether companies make cash forecasts, the answer is different depending on the nature of the person who asks them …
Yes, everyone makes a cash forecast, at least budget, once a year, a little “to see”. The exercise of short-term forecasting is more random, and the French reflex to consider that it is more complicated at home than in others, or different, remains an important obstacle to their effective elaboration.
In short, short-term cash forecasts are only made by a few large groups concerned about their optimization of their investment strategy, companies facing cash-flow problems, companies under LBO.
It’s a shame, because the “nice to have” is a “must have” that some do not understand until late, or too late.
This is particularly true in SMEs, whose managers tend to be satisfied with their net margin as the main indicator of performance monitoring, while the most fundamental remains its receipt … Free cash flow each month of its operation allows calmly to consider that the net margin will be positive, the reciprocal is false.
But when, finally, a company plans to develop cash flow forecasts, there is the cruel dilemma of knowing how to do it and what method to adopt.
Two main principles arise, coexist or contradict each other, rarely providing the same results and generating, for the most curious, sometimes complicated reconciliation exercises when they succeed.
The first approach, which is empirical, pragmatic, and above all faster, is based on forecasts of cash inflows and outflows, in line with the operating forecasts, but directly oriented towards the cash elements. These solutions make it possible to automatically manage cash-related issues: currency rates, elimination of intercompany flows, cash pooling, etc.
This approach has the advantage of only handling flows of the same nature, and consequently to aggregate them, to segment them, but especially to compare them to the main tangible financial reality of a group: the cash position. Reality tangible, but often difficult to apprehend.
The reliability of these forecasts ensures a regular comparison of the differences between the projected flows and the actual flows. This dynamic approach improves the quality of forecasts over time. In addition, it is a true vector of a cash culture within companies. Best of all, the people in charge of this exercise are able to know at each moment what are the cash flows, what the company cash and disburses …
The second, so-called “indirect” approach, incorporating an operating forecast, seasonality, collection and disbursement laws, however, incorporates many hypotheses generating very easily projection errors. The development of modeling is complex, it requires especially to enter a detail that is tempting to dig ever deeper, and involves the registration of laws very regularly. In addition, it is very difficult to track the quality of the forecasts over time, since the accounting departments do not carry out a continuous order: the actual / forecast comparisons are more complex.
Based on the observation of the Anglo-Saxon methods and also the results of recent scientific studies [i] , we prefer in the development of our solutions this first approach, housed in the cloud to simplify the collection of information and their consolidation for the most complex environments.
Pragmatism, speed and reliability. Such are the advantages of such a method, which is part of a dynamic perspective and which makes this indispensable exercise more accessible.
Finally, given the context, it is not useless to specify that following the cash-flows avoids unpleasant surprises, because flows are flows, and do not manipulate …
Etienne Téqui
[i] Jinhan Pae and Sung-Soo Yoon, Journal of Accounting, Auditing and Finance, January 2012 vol. 27 no. 123-144
