Cycle Time for Short-Term Cash Forecasting: Metric of the Month

An efficient short-term forecasting process helps CFOs save time and make better decisions when disruption hits.
Perry D. WigginsJanuary 3, 2023
Cycle Time for Short-Term Cash Forecasting: Metric of the Month
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In moments of disruption — whether from a global pandemic, geopolitical conflict, a recession, or something else — the need to prepare an accurate short-term cash flow forecast becomes critical. The ability to create and adjust these forecasts quickly allows management to make better and more informed decisions about the organization’s cash needs, investments, and expenditures when the going gets tough. 

Perry D. Wiggins

Benchmarking the time it takes to create a short-term forecast is a good way of evaluating readiness for disruptive scenarios. In this article, we’ll break down cross-industry data on short-term forecasting and talk about some of the factors that enable a faster, more accurate forecasting process. 

Based on data submitted by nearly 3,800 organizations, APQC finds that top performers on this measure (those in the 25th percentile) are able to develop a short-term cash flow forecast in two hours or less, while bottom performers (organizations in the 75th percentile) take four hours or more. 

It may seem like the gap between top and bottom performers is marginal — what difference does an extra hour or two make? Depending on how frequently an organization needs to forecast, a couple of hours can in fact make a big difference.

For example, a company with 9 to 12 months of cash on hand might consider 60 or 90 days “short term” and perform these forecasts less frequently. Those with a month or less cash on hand may need to forecast weekly or even multiple times per week, as many organizations began doing at the outset of the COVID-19 pandemic. A short-term forecast that takes half a day or longer to produce will leave less time for analysis and decision-making that helps steer the business, especially if you need to forecast multiple times per month.

Success Factors for Faster Forecasting

Top performers are able to forecast more quickly because they communicate well across functional silos, they leverage helpful technology like automation, and they work to continuously improve their forecasting process. These critical success factors, which we discuss in more detail below, not only benefit short-term forecasting but also long-term forecasting and related activities that use the same inputs.

Break Down Silos 

Delays in forecasting are often the result of poor communication and collaboration between business units, functional areas, and departments that provide the inputs for the forecast. If your finance team is not actively communicating with procurement, for example, you may not know about large expenditures they are planning or have already made. 

Similarly, if you are not up to speed on what sales are doing, you may underestimate cash inflows and end up with excess cash you could have been investing. Collaboration and communication with all relevant stakeholders will keep errors, mistaken assumptions, and subjective guesswork out of the forecast.

Use Technology to Get a Running Start 

The technology you use also plays a big role in the speed with which you can produce a short-term forecast. If your team is still forecasting manually with spreadsheets, there’s a good chance you will see dirty data and errors that require rework. Those will add to your cycle time. Automated forecasting tools on the market today can pull in finance data automatically from a banking source or from the general ledger. Creating a template that automatically populates the data you need can cut down on the time that you would otherwise spend finding and keying in that data manually.

If your team is still forecasting manually with spreadsheets, there’s a good chance you will see dirty data and errors that require rework, which in turn will add to your cycle time. 

Compare Forecast to Actuals to Fine Tune 

To continue strengthening your short-term forecast, it’s important to look back and compare it to your performance in any given period. Analyzing the variance between forecast and actuals will help you scrub problematic assumptions and find opportunities to improve the organization’s approach to forecasting. While 100 percent accuracy is not the goal, a lower degree of accuracy is a sign that you have room to improve your forecasting inputs and the process itself. 

In moments of disruption, the competitive advantage often goes to organizations that can respond to change more quickly than others. An optimized forecasting process built on good communication and automated inputs will be far more flexible if the business environment changes and you need to begin forecasting more frequently in response. Especially in moments like these, the ability to get a quick read on what’s coming could spell the difference between ongoing profitability and fighting an uphill battle to stay above water.

Perry D. Wiggins, CPA, is CFO, secretary, and treasurer for APQC, a nonprofit benchmarking and best practices research organization based in Houston.