Bank Cash Forecasting: Pandemic Edition

My friends at CFO Consulting Partners most recent newsletter included timely and helpful tips on re-forecasting your cash, which is suddenly incredibly important, particularly in financial institutions that entered the pandemic with relatively lower amounts of liquidity.

Cash Forecasting

by Rob Milrod, Director, CFO Consulting Partners (rmilrod@cfoconsultingpartners.com)

Cash forecasting, always important, becomes even more highly critical during times of economic disruption. Here are some key points to consider for an effective process:

1. Use a segmented approach to avoid over forecasting cash inflows. Consider customer segment, size, and seasonality - tax time could drive slower payment behavior for all types of clients.

2. Experiment with data that helps differentiate slower payers, e.g. credit ratings, industry, etc., to inform the forecast and contribute to faster collections.

3. Test solutions that help manage the lag between payments and collections; For example, tying accounts receivable team compensation to timely invoice issuance, offering discounts to slower paying customers for prompt payments, and perhaps requiring a partial upfront deposit from customers who regularly pay late.

4. Organize the forecasting approach and outputs in a consistent manner so that the accuracy of prior forecasts can be assessed. and so that it's clear where to adjust management's estimates.

5. For cash outflows, communication across the management team can make or break this process. Especially in a start-up where monthly spend patterns based on history are not available, there is no steady state to rely on. Management team members should regularly discuss and consolidate their outlooks for daily cash receipts and disbursements.

6. Start with prior bank statement activity to come up with typical monthly recurring items.

7. Map key bank statement items to actual expense so that the expense patterns in business plans and budgets can provide context for the cash forecast.

8. Identify cash items already expensed and therefore not in management's outlook, as well as future capital outlays. 

9. A detailed aging, accounts payable for outflows and accounts receivable for inflows, is a ready source of information for future cash flows and is extremely helpful in cash forecasting.   

10. Take into account any cash flow benefits from the new Coronavirus Aid, Relief, and. Economic Security Act.