The coming year will be characterised by continued market uncertainty as global central banks potentially diverge on their interest rate policy. While the Federal Reserve in the US is expected to continue with rate reductions, the Bank of England may hold rates steady and still other global regulators could raise rates once again.
As treasurers manage the market fluctuations that come with this environment, improving cash flow forecasting can be the difference between mitigating key financial risks and seeing those risks have consequences on the balance sheet.
For many corporate treasurers who have been in the business for years, operating in a stable interest rate environment was the norm. However, the past two years have marked a notable divergence from this norm, with interest rate hikes beginning in 2022 eventually leading to rate highs that hadn’t been seen for nearly two decades.
Rate increases have made treasurers more sensitive to using cash efficiently because the opportunity cost is more significant. As global central banks continue adjusting rates, treasurers must plan accordingly to manage their liquidity. Although many corporations today have access to cash-flow scenario modelling tools, this technology is highly underutilised by many corporate treasurers who are used to forecasting in a stable interest rate environment.
Those treasurers who harness the capabilities of cash-flow scenario modelling tools will be able to predict cash flows with more precision, edging out competition.
For treasurers, the ultimate goal is to have the ability to predict cash accurately up to at least 30 days out, and in many cases much longer. While this long-term forecasting goal may seem lofty to many treasury teams, the barrier to achieving it is simple: capturing accurate data.
Next generation tools are emerging to assist with cash-flow forecasting and scenario modelling, but those tools are only as good as the underlying data they access. The best treasury teams collaborate closely with the business, operations, and accounts payable and receivable to hold them accountable on data sourcing and quality.
Integration of enterprise resource planning software with other treasury applications to share data can help treasurers capture data from across the business and leverage it for cash forecasting purposes.
As treasury teams begin cash-flow scenario modelling and align on key performance indicators alongside the CFO, it is important to focus in on the metrics associated with liquidity itself, including free cash flow. Additional critical indicators can be factors that impact liquidity like days sales outstanding.
Businesses are investing heavily in AI capabilities for cash modelling, leveraging the technology to create simulations which can predict cash flow more accurately. Where treasurers once relied on mathematical models and historical averages, AI has improved the approach. While AI adoption is not yet ubiquitous, in another few years the vast majority of treasury departments will be using AI to forecast cash.
Steve Wiley is vice president of treasury solutions at FIS
