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Treasury

Treasurers seek the right formula for forecasting

Defining the boundaries of accuracy is crucial to useable financial forecasts. Experts are, nevertheless, reluctant to advocate omitting data that has previously proved of no value.

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According to the Association for Financial Professionals’ strategic role of treasury survey report 2020, organizations are now placing greater emphasis on forecasting than at any time over the last three years.

While accuracy levels for one-month forecasts should be high as they are based largely on known transactions, a three-month forecast may see cash flows land in different periods, projects delayed or changes in customer consumption.

A treasurer might not expect the same level of accuracy in forecasting, but key judgements need to be right, or it must be clear how they need to change.

The required level of forecast accuracy needs to be understood for each business type.

The degree of precision needed by a cash surplus business with plenty of available reserves will be different from that of a cash deficit business struggling to stay afloat.

“When building a forecast, only those variables that correlate to the actual output need to be considered,” says Sayid Shabeer, chief product officer at HighRadius, which specialises in AI-powered order-to-cash and treasury management software.

Outliers

Infineon checks how cash flow matches its predictions, but the company’s head of finance, treasury and investor relations, Alexander Foltin, acknowledges there will always be outliers.

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