the modern approach to cash forecasting · cash forecasting is an extremely important process that...

The Modern Approach to Cash Forecasting

Enhanced Accuracy Enables Smart Decisions

December 2013

Nick Castellina

This document is the result of primary research performed by Aberdeen Group. Aberdeen Group’s methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc.

December 2013

The Modern Approach to Cash Forecasting: Enhanced Accuracy Enables Smart Decisions

Cash forecasting is an extremely important process that organizations must execute effectively in order to succeed. Since cash is the lifeblood of a business, business leaders must know how much cash is going to be available to the organization at any given time. With this knowledge, they are then able to have confidence when making investments in things such as materials or new subsidiaries or decisions such as whether or not to extend product lines or take part in events. Cash forecasts are also important to ensure that the organization is able to pay its bills and that it collects cash from customers as intended. Accurate cash forecasting requires collaboration both internally and externally among diverse stakeholders in addition to well-defined processes. It takes the commitment of many individuals, plus the assistance of essential technology. In the past, spreadsheets and phone calls may have been sufficient to provide visibility into future cash positions. But as the speed of business increases (with more transactions, data, customers, employees, and business opportunities), organizations taking an outdated approach to cash forecasting are leaving their decision-makers flying blind. This Analyst Insight, derived from an Aberdeen survey of over 200 organizations, identifies the needs for and the steps to taking a modern approach to cash forecasting.

Business Environment Forecasts are ultimately pointless if they are not accurate or timely. Unfortunately, creating an accurate forecast is easier said than done. Aberdeen’s 2013 Financial Planning, Budgeting, and Forecasting survey illustrated the top pressures hindering these processes (Figure 1).

Figure 1: Pressures in Cash Forecasting

21%

23%

25%

32%

43%

0% 20% 40% 60%

Inability to trace business success to its keycomponents

Corporate mandate for growth

Current forecasting process is too long andresource-intensive

Growing operational costs

Market volatility creates the need todynamically account for change

Percentage of Respondents, n = 214 Source: Aberdeen Group, January 2013

Analyst Insight

Aberdeen’s Insights provide the analyst’s perspective on the research as drawn from an aggregated view of research surveys, interviews, and data analysis.

http://www.aberdeen.com/survey/0540-FinPlan-N/

The Modern Approach to Cash Forecasting: Enhanced Accuracy Enables Smart Decisions Page 2

© 2013 Aberdeen Group. Telephone: 617 854 5200 www.aberdeen.com Fax: 617 723 7897

Respondents were asked to select their top two pressures in planning, budgeting, and forecasting. The number one pressure facing organizations in cash forecasting is market volatility. In today’s business environment, conditions can change quickly and in an unpredictable manner. The variables are infinite. Customers may default on payments, competitors may emerge, new product lines may take off, or any number of other events may occur. This presents a problem for organizations trying to envision what their cash position will be in upcoming periods, and often causes organizations to carry sizeable cash cushions in order to mitigate against forecast inaccuracy. These organizations must be able to quickly revise forecasts so that they are based on the most current business conditions.

Operational pressures also impact cash forecasting. For example, growing operational costs put greater importance on making the most of investments, and any cash expenditure will come under watchful eyes. If these costs are unpredictable, it increases the difficulty of cash forecasting. Additionally, 23% of respondents cite corporate mandates for growth, further intensifying this pressure.

The forecasting process itself is also an issue. Twenty-five percent (25%) indicated that the forecasting process is too long and resource intensive. On the one hand, involving employees in the forecasting process takes them away from other duties. On the other, the longer the process takes, the less likely the final forecast will be based on current conditions.

Lastly, 21% noted an inability to trace business success to its key components. This means that organizations do not know which factors they should watch to help them create accurate forecasts. Or they may know which factors they should study, but do not have the technology or processes in place to integrate this information into forecasts.

While the cash forecasting process contains more than a few challenges, the confidence that an accurate forecast gives business leaders when making investments and decisions is more than worth it. Organizations that are successful in cash forecasting must account for volatility, manage costs and growth, identify business drivers, and facilitate the process. What follows is an analysis of the key strategies and capabilities of top-performing organizations that take a modern approach to cash forecasting.

The Modern Approach to Cash Forecasting The modern approach to cash forecasting employs a variety of strategies that involve stronger collaboration, greater visibility into business drivers, and better utilization of available data (Figure 2).



Figure 2: Modern Strategies for Cash Forecasting

20%

23%

25%

27%

30%

0% 20% 40%

Implement risk adjusted strategy andplanning measures by assessing risk and

its impact on an ongoing basis

Develop a consolidated view of theprocess and the results, to be available on

demand

Align treasury and risk managementinitiatives with financial planning

Involve more decision-makers in theforecasting process

Employ driver-driven analysis and scenariomodeling

Percentage of Respondents, n = 214 Source: Aberdeen Group, January 2013

Once again, respondents were asked to select their top two strategies in the face of the previously defined pressures. These can be combined into three key groupings: strategies that involve driver-driven forecasting, the need for collaboration, and providing visibility across the organization.

Thirty-percent (30%) of respondents employ driver-driven analysis and scenario modeling. Whether aided by technology or not, these organizations map out different potential results to understand how business events that could happen will affect future cash positions. For example, what happens if certain customers are late on payments? Or what happens if a certain product line sees increased demand and requires the organization to purchase more materials? The organization will then weigh all of the different scenarios and integrate the results into cash forecasts. Risk analysis is a significant component of this strategy. In a volatile market, the organization is exposed to numerous events that will impact performance, which is why 20% indicated that they assess risk and its impact on an on-going basis.

When it comes to collaboration, 27% involve more decision-makers in the forecasting process. Further, 25% align treasury and risk-management initiatives with overall financial planning. The finance department is not the only part of the organization that needs to understand how the business is likely to perform in the future as well as how much cash will be available. Many functions have insight into factors such as when customers will pay and major expenditures that will need to be made. Organizations that take a modern approach to cash forecasting involve more stakeholders.

Lastly, 23% make the results of the cash forecasting process widely available. What is the point of going through the exercise if the updated cash forecast is not easily accessible to those who would use it? So Treasury can update forecasts on an ongoing basis in one space, and then easily communicate changes to all.



Looking Forward The modern approach to cash forecasting involves a lot less guesswork than there has been in the past. Successful organizations really scrutinize the business drivers that impact an organization and weigh how different scenarios will impact future cash positions. Still, collaboration is just as important as driver-driven and risk-adjusted analysis in the cash forecasting process. Note that Best-in-Class organizations are 124% more likely than All Others to incorporate business drivers into the on-going forecasting processes (Figure 3). Those business drivers include many internal factors. Best-in-Class organizations are able to incorporate more sources of data and involve more stakeholders in the cash forecasting process. For example, 71% of the Best-in-Class are able to incorporate AP and AR data into forecasts. Therefore, they can better understand payment terms to ensure that cash forecasts are realistic. Additionally, cash forecasts are communicated back to other parts of the business. The shop floor will be able to forecast greater production when they know that the organization will have the cash to invest in materials. This helps provide those in charge with the essential information they need to make forecasts based on all the relevant data.

Figure 3: Considering All Angles in Cash Forecasting

76% 71%

49%

35%

56%

31%32%39%

28%

0%

20%

40%

60%

80%

Ability to incorporatebusiness drivers into the on-

going forecasting process

Ability to incorporateAccounts Payable (AP) andAccounts Receivable (AR)

data into forecasts

Ability to incorporate treasuryassessments in the financial

planning process

Per

cent

age

of R

espo

nden

ts, n

= 2

14

Best-in-Class Industry Average Laggard

Source: Aberdeen Group, January 2013

What are the modern capabilities for completing the forecasting process? Best-in-Class organizations address the pressure of a long and intensive forecasting process by promoting efficiency and adding the potential for agility (Figure 4).

Aberdeen Methodology

The Aberdeen maturity class is comprised of three groups of survey respondents. This data is used to determine overall company performance. Classified by their self-reported performance across several key metrics, each respondent falls into one of three categories: √ Best-in-Class: Top 20% of

respondents based on performance

√ Industry Average: Middle 50% of respondents based on performance

√ Laggard: Bottom 30% of respondents based on performance

Sometimes we refer to a fourth category, All Others, which is Industry Average and Laggard combined.

How Do You Rate?

In the report, Financial Planning, Budgeting, and Forecasting: Removing the Hurdles, respondents were ranked on the following criteria:

√ Percentage of financial reports delivered in the time needed for decision-making: Best-in-Class – 94%, Industry Average – 76%, Laggard – 58%

√ Percentage that actual costs are within budgeted costs (above or below): Best-in-Class – 3%, Industry Average – 9%, Laggard – 20%

√ Percentage that actual revenue is within forecasted revenue (above or below): Best-in-Class – 2%, Industry Average – 10%, Laggard – 22%

http://www.aberdeen.com/Aberdeen-Library/8321/RA-planning-budgeting-forecasting.aspx





Figure 4: Capabilities of the Modern Organization

74%

39%

69% 71%60%

17%

36%

56%

0%

20%

40%

60%

80%

Templates are usedto communicate and

manage input

Line managerstrained in the use ofanalytical methods

and tools

Ability to perform “what if” scenarios

and change analysis

Ability to re-forecastas market conditions

changePer

cent

age

of R

espo

nden

ts, n

= 2

14 Best-in-Class All Others


For example, 74% of the Best-in-Class utilize templates. These templates ensure that whoever is going through the processes follows all of the steps that are defined as best practices. This includes identifying all essential data and involving all essential stakeholders. Another way in which Best-in-Class organizations make the cash forecasting process easier for contributors is by aiding them with the tools to quickly integrate forward-looking data. Truly, Best-in-Class organizations are more than twice as likely as All Others to train line managers on the use of analytical methods and tools. This training helps to ensure that the rest of their modern organization is on the same page as Treasury. They will then “buy-in” and utilize any tools available to them.

The modern organization is also more likely to have capabilities to make scenario planning easier while becoming more agile to integrate business change into forecasts. Best-in-Class organizations are 92% more likely than All Others to be able to perform “what-if” scenarios and change analysis. Not only can they integrate this data into cash forecasts, they can also create contingency plans that will enable them to react quickly if conditions do change. This contributes to the fact that 71% of the Best-in-Class have the ability to create rolling forecasts, which in turn helps address the business pressure of market volatility by ensuring that forecasts are based on the most recent business conditions.

Organizations that take a modern approach to cash forecasting involve more stakeholders in the process, provide visibility across the organization, incorporate business drivers and scenario planning, and are as agile as possible. While some of these things can be accomplished manually, organizations may discover that technology tools can help them be even more successful in cash forecasting. This begs the question, how is a modern cash forecasting process different from cash forecasting processes of the past?



Technology’s Role in Cash Forecasting Spreadsheets should be very familiar to anyone who has taken part in the cash forecasting process, or many other processes, in the past. Most professionals today are comfortable using spreadsheets. Their use may even extend beyond work into their outside lives. In fact, 89% of organizations utilize spreadsheets in some form during forecasting. This should be unsurprising, as they are relatively simple to use and easy to read. But there is another side to that coin. Spreadsheets are not easily shared because there may be problems with version control, formulas created by one employee may be broken, and they must be updated manually. Today, many Treasurers are forced to manually input guesses from many key stakeholders into one comprehensive cash forecast, which is time consuming and prone to mistakes. That is not to say that spreadsheets are a thing of the past in the cash forecasting process. They will never go away. Aberdeen’s research, however, finds that Best-in-Class organizations limit the ways in which they are used (Figure 5).

Figure 5: The New Role of Spreadsheets

55%

23%

10%

45%

30%24%

0%

20%

40%

60%

Data is exported fromapplications to

spreadsheets and canbe securely accessedfrom a shared server

Spreadsheets are ouronly method of

communication andinteraction through the

process

Spreadsheets are ourprimary method today,but we are planning toreplace this within the

next 12 months

Per

cent

age

of R

espo

nden

ts, n

= 2

14 Best-in-Class All Others


Instead of relying solely on spreadsheets, Best-in-Class organizations export data from other applications and utilize them as a method of data consumption. While Laggard and Industry Average organizations are more likely to utilize spreadsheets as their primary method of input and communication in cash forecasting, Best-in-Class organizations utilize other technologies to populate, share, and consume the data contained in spreadsheet form. This is referred to as taking a “Beyond Spreadsheets” approach. This approach helps to enable more user access of more accurate data, which leads to quicker decisions and more accurate forecasts (see sidebar, The Benefits of a “Beyond Spreadsheets” Approach).

Today’s modern organization may depend on more robust technology than spreadsheets in order to perform the cash forecasting process. There are a wide range of technologies available that can help in the process (Table 1). Since it is perceived that many employees are comfortable with using

The Benefits of a “Beyond Spreadsheets” Approach

Organizations that take a “Beyond Spreadsheets” approach to forecasting are more accurate and agile while delivering more data in the time needed by employees:

√ Year over year change in the time it takes to complete forecasts: 1.3% decrease vs. 2.3% increase

√ Percentage of financial reports delivered in the time needed by managers: 77% vs. 69%

√ Percentage of stakeholders with access to financial performance data: 71% vs. 64%

√ Percentage of accurate financial reports: 84% vs. 74%

√ Percentage that actual costs are within budgeted costs: 10% vs. 13%

√ Percentage that actual revenue is within budgeted revenue: 11% vs. 13%



spreadsheets, some of these more advanced applications mimic that look and feel.

Table 1: Key Enablers of the Best-in-Class

Best-in-Class

All Others

Query and reporting tools 79% 56%

Financial reporting and consolidation application 70% 53%

Planning / budgeting / forecasting application 68% 47%

Dashboard / scorecard tools 66% 38%

Enterprise Resource Planning 62% 49%

Enterprise BI platform 50% 28%

Enterprise Performance Management 49% 30%

Business Process Management 38% 20%

Predictive Analytics 26% 12%


For example, there are relatively simple enablers such as query and reporting tools or scorecard tools. Best-in-Class organizations are more likely than All Others to utilize these applications, which help contributors find the data they need and determine how that data should be integrated into forecasts. More robust tools include Enterprise Resource Planning (ERP) and Enterprise Performance Management (EPM) systems. These comprehensive solutions contain all of the internal data needed to make decisions. Additionally, there are financial reporting and consolidation applications that help to ensure accuracy and completeness of data. Other tools include Business Intelligence (BI) or predictive analytics, which help organizations provide accuracy when taking a predictive outlook on data. Finally, Best-in-Class organizations are 45% more likely than All Others to utilize planning, budgeting, and forecasting applications to greatly simplify these processes. This is the type of tool that would contain templates for forecasting. These tools alone will not remove all of the difficulty from cash forecasting; however, they should be used in support of the processes and strategies that comprise a modern approach to cash forecasting.

Unfortunately, those that create cash forecasts may have little input or influence into the buying process for the above technologies. In some cases, forecasters may get lucky and only need to convince others that they need access to tools the organization has already implemented, such as ERP. In other cases, the organization may feel that it is too small for a significant software investment, no matter the use case. Alternative emerging technologies, such as the cloud, may make that conversation easier. Today, Best-in-Class organizations are 124% more likely than All Others to deploy the application they use for forecasting in the cloud using the Software as a Service (SaaS) model.

Fast Fact

√ Thirty-eight percent (38%) of Best-in-Class organizations implement the tool they use for forecasting as Software as a Service (SaaS) / Cloud / On-Demand. This is in comparison to 20% of the Industry Average and 17% of Laggards.



The reason a cloud solution may be more attractive begins with a description of what it means to say a business solution is delivered “in the cloud.” “Cloud” is a broad term that basically covers solutions delivered through the internet. This includes a few subsets.

“Hosted” solutions are licensed applications hosted by a third-party. This deployment method may be in a separate instance on a separate piece of hardware (dedicated to an organization), or in a separate virtual instance (dedicated to an organization) where the application is housed on hardware shared by multiple companies.

Another type of cloud solution is called “Software as a Service (SaaS)” or “on-demand.” The software is not licensed or owned by the end user; it is provided as a service. It is often paid for on a subscription basis and can be accessed from a normal internet connection.

Why would employees in Treasury, or other roles, be more likely to convince their organizations to implement a cloud solution? There are many key benefits of the cloud (see sidebar, The Tipping Point for Cloud Solutions). With a cloud solution, software is managed by the vendor; therefore, it does not require in-house IT support. Updates are handled automatically, ensuring that the organization always has access to current software versions. Additionally, by nature of the fact that anyone with an internet connection (and credentials) can access a cloud solution, it enables more contributors to be involved and collaborate. Most importantly, a cloud solution enables the organization to save money on deployment. In the SaaS model, the organization is billed on a monthly basis, so it is able to record the cost as an operating expense rather than making a large upfront capital expenditure. Since cash forecasting is such an essential operation, this should help to make the decision easier for those higher up in the organization.

Business Intelligence Enables Driver Analysis It was noted above that Best-in-Class organizations are 79% more likely than All Others to utilize Business Intelligence and 117% more likely than All Others to have predictive analytics. These tools enable better visibility and sharing of data as well as the ability to use business drivers in the forecasting process. Organizations with BI are more likely than those without to have capabilities that are essential to the modern approach to cash forecasting (Figure 6).

The Tipping Point for Cloud Solutions

Aberdeen’s SaaS and Cloud ERP Observations: Is Cloud ERP Right for You? identified the reasons that organizations select a cloud solution:

√ 35% – Must reduce IT costs

√ 31% – Need for collaboration amongst an increasing number of locations

√ 24% – The cost of capital funding is too high with an on-premise solution

√ 24% – An increasingly global workforce working in multiple time zones

√ 22% – Have a dated technology infrastructure

http://www.aberdeen.com/Aberdeen-Library/7857/RA-enterprise-resource-planning.aspx





Figure 6: BI Enables Agility and Visibility

48%

84%

45%

24%

64%

18%

0%

30%

60%

90%

Real-time updates tofinancial metrics

Ability to createvariance reports

Share analytical datawith the extended

enterprise(customers, suppliers,

resellers, etc.)

Per

cent

age

of R

espo

nden

ts, n

= 2

14 Business Intelligence No BI


With BI, organizations are twice as likely to have real-time updates to financial metrics. This helps to ensure that the data they use in cash forecasts is current. Additionally, 84% of organizations with BI have the ability to create variance reports. They, therefore, can examine how actuals compare to past forecasts and use that knowledge to revise forecasts. Perhaps most important is the capability that BI enables to share data with the extended enterprise. Organizations with BI are 2.5 times as likely as those without to be able to share data with customers, suppliers, resellers, regulatory bodies, and more. These organizations can better understand payment terms, demand, the availability of materials, and any other factor important for cash forecasting that originates outside of the organization itself. If the modern approach to cash forecasting requires collaboration and the integration of key business drivers, this capability should be a cornerstone.

But for many organizations the purchase of technology ultimately comes down to the potential impact on the bottom line. Organizations with BI have seen performance increases that point to how the technology can facilitate improvement in cash forecasting (Figure 7). When comparing organizations with BI to organizations without BI, those with BI are able to provide a larger percentage of stakeholders with access to financial performance data. This enables greater collaboration, and this data is more likely to be delivered in the time they need to make decisions, which impacts agility. The proof is that organizations with BI saw a 15% decrease in time to decision over the past year. They are able to access the data they need easily, utilize it to alter forecasts, and quickly react to make smart decisions. Perhaps because of this, these organizations have seen greater increases in revenue growth and operating margins. Accurate cash forecasts



are meant to facilitate smart decisions and investments. Part of a modern approach to cash forecasting involves the utilization of BI.

Figure 7: The Value Proposition

72% 78%

61%

76%

0%

20%

40%

60%

80%

100%

Percentage of stakeholderswith access to financial

performance data

Percentage of internalfinancial reports that weredelivered in time needed

by managers

Per

cent

age

of E

mpl

oyee

s, n

= 2

14

Business Intelligence No BI

15%

10% 9%11%

9%

5%

0%

20%

Decrease in timeto decision over

the past year

Revenue growthover past 24

Change inoperating margins

over past 24

Per

cent

age

Cha

nge,

n =

214


Key Takeaways and Recommendations In a business environment that is highly volatile, with processes that have been time consuming and difficult to complete in the past, organizations must take a more modern approach to forecasting. Requirements include collaboration, visibility, adaptation, and data integration. Those organizations that wish to take a modern approach to cash forecasting should heed the following recommendations.

• Involve more functions and scenario plans in forecasting. For example, 71% of the Best-in-Class are able to incorporate AP and AR into planning and forecasting. This is essential data for a cash forecast. Additionally, Best-in-Class organizations are 92% more likely than All Others to be able to perform “what-if” scenarios and change analysis. These organizations can better weigh potential outcomes and integrate them into cash forecasts.

• Automate the forecasting process. This means to make it as easy as possible. One way to do this is through templates, which 74% of the Best-in-Class currently use.

• Provide greater visibility. Whether through real-time updates or access to data from the extended enterprise, organizations that take a modern approach to cash forecasting provide visibility into essential data for stakeholders. Without this visibility, it would be impossible to incorporate key business drivers into the ongoing forecasting process.

• Be agile. In a volatile market, forecasts made today can become completely unrealistic tomorrow. Organizations must be agile in



changing forecasts. Truly, 71% of the Best-in-Class have the ability to create rolling forecasts.

• Take a “Beyond Spreadsheets” approach to forecasting. Spreadsheets will never go away. But modern organizations are careful in how they use them for cash forecasting. Focus on using them as a method of consumption and leave the heavy lifting to other technologies.

• Implement key technologies. These technologies include software such as ERP and BI. Create a good business case, and the entire organization can benefit from their utility.

A modern approach to cash forecasting is designed to provide greater accuracy than was achievable in the past. With this accuracy, business leaders will be armed with the confidence they need to make decisions that will grow the business.

For more information on this or other research topics, please visit www.aberdeen.com

Related Research

Don’t Fly Blind When Budgeting and Forecasting: The Value of Being Driver-Conscious; November 2013 Aligning Long-term Plans with Short-term Forecasts: Maintaining Productivity without Losing Sight of Goals; September 2013

Culture, Collaboration and Coordination: Driving High Performance with EPM; January 2013 Improving S&OP with Planning and Forecasting Technology: An Integrated Look at Financial and Business Planning; October 2012

Author: Nick Castellina, Senior Research Analyst, Business Planning and Execution ([email protected])

For more than two decades, Aberdeen’s research has been helping corporations worldwide become Best-in-Class. Having benchmarked the performance of more than 644,000 companies, Aberdeen is uniquely positioned to provide organizations with the facts that matter — the facts that enable companies to get ahead and drive results. That’s why our research is relied on by more than 2.5 million readers in over 40 countries, 90% of the Fortune 1,000, and 93% of the Technology 500. As a Harte-Hanks Company, Aberdeen’s research provides insight and analysis to the Harte-Hanks community of local, regional, national and international marketing executives. Combined, we help our customers leverage the power of insight to deliver innovative multichannel marketing programs that drive business-changing results. For additional information, visit Aberdeen http://www.aberdeen.com or call (617) 854-5200, or to learn more about Harte-Hanks, call (800) 456-9748 or go to http://www.harte-hanks.com. This document is the result of primary research performed by Aberdeen Group. Aberdeen Group’s methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc. (2013a)

http://www.aberdeen.com/

http://aberdeen.com/Aberdeen-Library/8699/RA-planning-budgeting-forecasting.aspx






http://aberdeen.com/Aberdeen-Library/6513/RA-enterprise-performance-management.aspx

http://aberdeen.com/Aberdeen-Library/6513/RA-enterprise-performance-management.aspx

http://aberdeen.com/Aberdeen-Library/7844/RA-financial-planning-forecasting.aspx



mailto:[email protected]

the modern approach to cash forecasting · cash forecasting is an extremely important process that...

Documents