How far ahead do Treasurers forecast?

Poll Results

256 votes on this poll, a record! We are delighted to see more and more treasurers actively engage with our polls. Thank you all very very much!

Question: As a treasurer, how far ahead do you forecast?

Results

• 12 months (131 votes, 51%)
• 3-12 months (72 votes, 28%)
• 1-3 months (44 votes, 17%)
• 0-1 month (9 votes, 4%)

First observation

The poll results show that a majority of treasurers (51%) forecast up to 12 months ahead, followed by 28% who forecast within the range of 3-12 months, while 17% forecast within 1-3 months, and a smaller percentage of 4% focus on a shorter horizon of 0-1 month. Given the significant percentage of treasurers forecasting up to 12 months ahead, it would be valuable to explore the potential benefits and challenges associated with such a long-term forecasting approach.

View of treasuryXL expert

Conor Deegan (CashAnalytics)

“Choosing the right reporting period can have a big impact on the accuracy and reliability of your forecast “

What considerations should treasurers keep in mind when deciding on their forecasting horizon, any specific factors, or influences?

One of the most important considerations for treasurers when deciding on their forecasting horizon is to understand the context of the forecasting. This means that the forecast should be based on the needs of the organisation and its goals. To ensure you see actionable business insights from a cash flow forecast, you should start by determining the business objective that the forecast should support.

For example, a company seeking to gain visibility over quarter-end covenant positions will need a different forecasting process than a company that needs to manage debt repayments on a weekly basis.

An organization should also consider the cash forecasting tools that are available to them. The spreadsheet is often the default tool for many planning, forecasting and data modelling activities due to the fact that it is available to everyone and used for so many other activities. It’s the easy choice.

The reason that companies don’t evolve past the spreadsheet, which can quickly become problematic, is that the other systems they may look to help manage the process – such as ERPs and treasury management systems – are designed for completely different types of activities and aren’t fit for the purpose of anything other than basic forecasting.

Spreadsheets are fantastic and no finance or treasury function could run without them. However, when it comes to putting in place a cash forecasting process that supports important and meaningful business activity such as funding planning and quarter-end forecasting, they quickly run into problems.

These problems generally fall into three categories; time and effort spent on the process, due to the manual work involved, reliability and scalability.

At CashAnalytics, when a person arrives at the task of forecasting with 99% of the work already done. They are immediately engaged with the higher value end of the process which is interrogating and understanding the cash flow data and forecasts with the ultimate goal of maximising the use of cash within their organisation.

Based on the poll results, a significant percentage of treasurers forecast up to 12 months ahead. What are the potential benefits and drawbacks of such a long-term forecasting approach, particularly in terms of cash management and liquidity planning?

Choosing the right reporting period can have a big impact on the accuracy and reliability of your forecast. Generally, there’s a trade-off between the availability of data and the forecasting horizon. Long-term forecasts can be inaccurate and less detailed as there are a lot of uncertainties. Hence the importance of choosing the right reporting period as it can have a big impact on the accuracy and reliability of your forecast.

Short-term forecasts typically look two to four weeks into the future and contain a daily breakdown of cash payments and receipts. As you might expect, short-term forecasts are often best suited for short-term liquidity planning, where day-to-day granularity is important to ensure a business can meet its financial obligations.

Medium-term forecasts typically look two to six months into the future and are extremely useful for interest and debt reduction, liquidity risk management, and key date visibility. The most common medium-term forecast is the rolling 13-week cash flow forecast.

Longer-term forecasts typically look 6–12 months into the future and are often the starting point for annual budgeting processes. They’re also an important tool for assessing the cash required for long-term growth strategies and capital projects.

Mixed-period forecasts use a mix of the three periods above and are commonly used for liquidity risk management. For example, a mixed period forecast may provide weekly forecasts for the first three months and then on a month-to-month basis for the next six months after that.

For treasurers who have a shorter forecasting horizon, ranging from 3 months to 1 month, what do you believe could be a reason behind this preference?

Shorter-term forecasts, in the 1-week to the 3-month range, are suitable for a large variety of treasury activities that are difficult to support with longer-term budgets and projections. This is mainly due to the fact that treasury activities require a level of detail and accuracy that can only be provided by short-term forecasts.

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Once again, we thank all treasurers for voting, and of course Conor Deegan of CashAnaltyics for sharing his views on the subject. Make sure you follow treasuryXL to keep up to date with the next interesting polls.