Treasury management is a broad discipline, covering many complex topics, but at the end of the day, it all comes down to making sure you have enough money to pay your bills and stay in business. As they say, Cash is King, and making sure you have enough cash, is the primary job of the treasury function in any company.
Almost everything else we will cover in our Treasury Insights series comes back to ensuring we have enough money to keep the business running;
- FX risk – how are my cashflows going to change if FX rates change?
- Interest rate hedging – how much more do I have to pay if rates move higher?
- Credit risk – what happens if someone owes me money and can’t pay, or I have too much money sitting in one place?
- Funding – what do I do if I don’t have enough cash?
- Investments – how to ensure my excess cash is earning money?
And so on.
Cash visibility and forecasting are the single most important parts of treasury management, and because there are so many consequential decisions that sit on top of your forecasts, the accuracy and confidence in these numbers is of paramount importance.
Forecasting and Liquidity management looks different depending on your stage, industry, customers and complexity but generally require the following;
- Cash Visibility – how much money is in your account at the moment. Is it the amount you expect?
- Reconciliations – If not, what is missing, is it a forecasting issue (if so, how can you improve your forecasts), if not, is it a bigger issue?, do you need to escalate?
- 13-week forecast – accurate forecast of expected cashflows for the next quarter based on contracted and expected cash flows. When does you cash balance reach its lowest?, what if some receipts are delayed?, do you have enough of a buffer?
- Longer term forecast – varying levels of accuracy and focus depending on industry and stage (see below)
- Buffers, Funding & Contingencies
- Excess Cash balances
In financial services, systems and tools make reporting and visibility much easier, but the sheer volume of information can make reconciliation more time consuming, and identifying and correcting problems extremely difficult. The most common model relies on a structural maturity mismatch which creates a natural liquidity risk; borrowing through cheaper short-term channels such as customer deposits, and lending longer term commercial loans or mortgages at higher interest rates. Customer behaviour can be difficult to predict, but large granular deposit books lend themselves to broad assumptions around customer behaviour which rarely change overnight. Given the inherent liquidity mismatch, banks rely on complex calculations (Net Stable Funding and Liquidity Coverage ratios) to ensure you have enough funds to cover expected outflows over 30 days stress period, and longer-term funding needs over the next year.
The same job at three sizes
The fundamentals are the same at every size — cash visibility, a forecast you trust, and a funding backstop — but what dominates changes as you grow. Open a stage for the full detail, or scan the summary table at the end.
Start-ups. In a startups and new businesses, your biggest concern will be runway. … read more show less
How much money do you have? How long do you expect that to last? More importantly, how long can you survive if sales don’t come in?, or if costs are higher than expected?. As you grow, naturally you take on more costs, so the consequences of delayed income becomes more severe. This is a common trap for growing business. Start-up’s have very few options when it comes to funding, and none that can be turned on easily at short notice (unless you have a founder with deep pockets). Grant applications can take a lot of time. Fundraising is an extremely time-consuming processes. You need to be planning to raise funds at least 6 months before you think you will need the money. For most start-ups, an accurate 3-month forecast (to ensure you have enough money in the account to pay your bills) and a broader 2-3 year forecast (to ensure you have sufficient runway and can time your fundraising accordingly) are essential. For the short-term forecast, tracking your accounts payable and receivables and recurring subscriptions is a solid starting point to give you visibility on your immediate cashflows, and layer on your expected costs and highly likely receipts. If you have broader revenue projections, treat these conservatively, it is one thing to be bullish for investors but a different things entirely to plan your business based on your best-case scenario. Work to the down case, and set a hard runway trigger (e.g start raising at X months cash remaining) as a standing rule to avoid having to make a judgement call under pressure.
Mid-size corporates. For mid-market corporates, with a track record, sales history, established relationships and incremental growth, the job is easier, but no less important. … read more show less
As you grow, expand into new markets, take on debt, the other treasury exposures become more significant, so the pressure on your forecasts becomes larger.
Again cash visibility if the first step. This becomes more difficult and time consuming as you add more accounts across geographies and group entities, but Open Banking tools are making it easier to bring this information into one place for Group Treasurers. For the 13 week forecast, AI tools are improving significantly, and can help identify and project recurring cash flows and seasonal patterns. As a mid-size company CFO/Treasurer you should also have an established process for engaging with sales & marketing functions to get estimates of sales activity, pipeline progression and conversion metrics. You can get resistance from sales teams who want to manage expectations and don’t want to be pinned to a higher/lower targets, but it is important to get this process working well as it is the best source of insights into the business flows, and fluid feedback if expectations change. It helps if these conversations happen separately to the rewards or target setting or review process.
Longer term forecast should be easier than early stage companies. With established customers, you should be able to project longer term cash flows with more, but the focus here is less on precise cashflow timing and more on identifying key risks, such as funding gaps or pricing exposures (market risk) that could impact company margins and profitability if not managed. Forecast horizon depends on how far you can confidently forecast your exposure, but as a minimum tends to cover your next annual reporting period but often extends to 2-3 years.
As you build up a customer track record and comprehensive reporting, there are a number of liquidity metrics that you can keep track of to identify improving or deteriorating liquidity position. After cash balances, Current/Quick and Cash ratios give various of your ability to meet short term liabilities with cash, liquid assets and expected short assets. You can also track the amount of time (days) it takes for Sales (Days Sales Outstanding), Payables (DPO) and Inventory(Inventory turnover) to convert to cash flows. Combining these numbers give you an insight into your cash conversion cycle (or how quickly your business activities convert into real cash. This is a valuable metric as an early indicator into a deteriorating liquidity position due to a change in contract conditions or customer behaviour.
When it comes to market risk, the purpose of these forecasts is to assess the level of price (FX, Interest rate or commodity price) risk inherent in the business, and whether anything needs to be done to mitigate against movements in these price factors. It helps in this decisions making process if you can differentiate between contracted (highly likely), forecasted (likely, but not signed) and expected cash flows, as this can feed into your hedging policy where you may agree to adopt a different hedge ration depending on the certainty of the cashflow.
You may also encounter contingent cash flows. For example if you are tendering for a large project with significant foreign currency pricing element, you will have to make price assumptions around the FX rate you use. Sometimes you have the luxury of pricing in some headroom, or agreeing a pass through if rates move, but if not, it is important to track these exposures even while they are highly uncertain. Often these needed to be treated separately from a risk management point of view because of their uncertain nature, and may require different hedging products or strategies if you want to mitigate their risk. No-one will thank you when they are popping the champagne corks after winning a big project when you have to tell them the contract is now costing the firm money because the FX rate moved.
It is important to continue to assess and update your forecasts and recategorize cashflows as their certainty increases (or decreases) as they get closer.
Large corporates. At group scale the problem changes from information to infrastructure. … read more show less
A multinational may run hundreds of accounts across dozens of banks, currencies and entities, so visibility depends on connectivity – a TMS fed by SWIFT or API bank reporting – rather than someone logging into portals each morning. Cash is concentrated through pooling structures and, at the larger end, an in-house bank paying on behalf of subsidiaries, so the group treasurer manages one central position rather than chasing balances entity by entity. The complications are structural: trapped cash in restricted markets, intercompany funding across jurisdictions, and a group forecast assembled from dozens of local submissions of varying quality – so forecast governance (common templates, deadlines, accuracy tracking by entity) matters as much as the numbers themselves. Day-to-day liquidity is rarely the worry – a rated issuer with committed facilities and commercial paper access has options a start-up can only dream of – but the cost of getting it wrong scales too, so minimum cash buffers, facility headroom and counterparty exposure are set out in a formal liquidity policy approved by the board rather than left to judgement calls. The board doesn’t ask whether you can pay the bills; it asks how much cash the group is holding, where it sits, what it earns, and why.
The three stages, compared
| Start-up | Mid-size | Large corporate | |
|---|---|---|---|
| Cash visibility | Track AP, AR and recurring subscriptions | Harder across entities & geographies; Open Banking helps | Connectivity — a TMS fed by SWIFT/API, not portals |
| Forecast focus | Tight 3-month view + a broad 2–3 year runway | 13-week (AI-assisted) + sales pipeline; long view on risks | Group forecast from many entities; governance-led |
| Funding options | Few, none quick — grants, raises (6+ months’ lead) | Bank lines and a track record; exposures now bite | Rated issuer — CP, committed facilities, in-house bank |
| Discipline | Down case; hard trigger to raise at X months’ cash | Liquidity ratios & cash-conversion cycle; hedge by certainty | Board-approved liquidity policy; buffers & limits |
Summary
You should recognise that your forecasts will never be perfect, but should aim to continuously improve your forecast accuracy. To achieve this, tracking accuracy as a KPI (e.g. forecast vs actual variance by week) can help not only improve forecast, but identify early when they are starting to drift so you can identify gaps and tweak inputs.
Forecast accuracy and KPIs are redundant if you don’t have confidence in your starting point, which is your starting cash position. We cover Cash Visibility and Cash Forecasting in our next sections. Stay tuned.