How do you keep improving your process?
There are a number of steps you can take toward continuous improvement, such as a regular variance analysis in your cash flow forecasting procedure to determine how accurate the model was. Consider:
- Evaluating the impact of unusual or unexpected events during the time period.
- Analyzing variances between the forecast and actual outcomes to determine if modifications are needed in your process.
- Discerning how structural changes may impact historical trends. These can include changes in customer behaviors, postal system initiatives and payment system evolution. If you recognize structural changes or trends, consider a heavier weighting to more recent data observations.
How can you work with other areas of the organization to improve precision?
Review the level of coordination that exists with operating units and functions. Incorporate expected impacts from new events. Are new product launches with extended terms on the horizon? Any recent shift in minimum order sizes? Initiatives to shorten collection cycle times? Is accounts payable thinking about extending average payment terms?
Consider operational changes to encourage more timely planning, such as restricting last-minute wire transfer or manual check requests and requiring senior management approval for any exceptions to these rules.
What are some characteristics of effective cash flow forecasting models?
The most effective models often don’t focus on a single expected state. Consider expanding your model’s flexibility to include the impact of a variety of assumptions and scenarios. Focus and plan for worst case. Precise cash flow forecasting is not easy, but companies that succeed can optimize their cash flow and significantly improve decision-making and best practice behaviors.
This article was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell securities or to engage in any specific transactions, and does not purport to be comprehensive. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other adviser regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.
©2010 The PNC Financial Services Group, Inc. All rights reserved.
Gabe J. Galioto is vice president and treasury management officer for PNC. Reach him at (412) 768-1819 or [email protected].
