The Cash Forecaster's Almanac

Like the weather, cash forecasting is unpredictable. That's why so many companies give it short shrift and why those that put forth a serious effort are consistently far off the mark. A poor job of forecasting can create serious problems — but the good news is there are many ways to improve the processes.

Peel back the layers of cash management and you'll see that the cash forecast is the heart and soul of the matter. The cash forecast can be formal, sophisticated and automated with the best available software, or it can be simple and intuitive. But without a forecast, cash would be unmanageable.

A good forecast can help you manage your company's finances smoothly and efficiently. You can plan borrowing to minimize interest expenses and structure investments to maximize return. And you can see that the cash you need to support operations is always there.

A forecast that's way off base can mean that you have to stall creditors or resort to investing borrowed money at a negative spread or, worst of all, you might lack the liquidity to take advantage of a significant business opportunity.

The irony is that the cash forecast is almost always wrong. The art of forecasting cash, except at a handful of perfectly predictable ventures, consists of working to trim the inevitable margin of error. "In the 20-some years we've been following cash forecasting," notes consultant Anthony J. Carfang, partner at Treasury Strategies Inc., Chicago, "we haven't seen anybody do it well. We have seen some companies spend a lot of money and think they are doing it well."

"I don't know of a company that's good at forecasting," echoes principal and treasury management consultant James S. Sagner, Sagner\Marks, West Orange, N.J. "Even the big ones that work hard at it are off sometimes by 100 percent. A lot of the problem is unavoidable — events that you plan on just don't occur when they should."