Forecasting Summary

Forecasting (or budgeting) provides organizations with a tool that gives them the benefits as shown in the picture.

  • Agility: Insight will allow for pro-activity instead of reactivity
  • Improvement mindset: Frequent planning cycles will force an organization to continuously think about and improve the future
  • Risk reducing: Scenario testing allows for multiple possible outcomes and enables the preparation of mitigation plans for those risks that need to be addressed
  • Accuracy: Organizations that forecast frequently optimize their forecasting in- and output and achieve better accuracy along the way, with better results overall on the other benefits as well

A good forecasting process is a very powerful tool that serves an organization to make better informed decisions. It does this by for example allowing scenario testing. In this way the impact of decisions can be input in the model to forecast the outcome in differing circumstances. It will also allow for an organization to stress test its balance sheet, income statement and cash flow statement. In this sense all kind of what-if questions can easily be answered with a forecasting tool. Organizations using a well thought out forecasting tool will be pro-active instead of reactive. It is these organizations that more easily weather a storm because they know the impact of severe circumstances upfront. They are also more inclined to find out possible solutions to such circumstances. For example by renegotiating financing terms in good times and stretching limits and covenants based on the possible outcomes of the stress testing.


Forecasting benefits

Depending on the organization’s business model, the products and services it offers and the markets in which it operates the forecasting tool will need to have different input parameters. For example agricultural organizations may want to have stress tests of weather conditions impact on the harvest results in their forecast to make informed decisions about hedging against this risk or not. Steel companies may want to include the impact of import regulations in their forecast to make an informed decision for the next capital expenditure or divestment in manufacturing facilities.

Besides these strategic forecasting tools there are also medium- and short term forecasts as spin-offs that are utilized to assess for example the short term cash needs. This helps in determining the optimal mix between medium term funding and short term credit line needs.

A forecasting model must be tailored to the organization as the input parameters are unique to that organization. The generic inputs are however equally the same for each forecast but may differ in magnitude of input:

  • Financing
  • Investing
  • Operating

These constitute all the balance sheet, income statement and cash flow items to project a full financial report in a possible future point in time.

Contact Treasury Improvement for more information on reviewing or implementing forecasting or budgeting processes for your organization.

What is forecasting?

Forecasting is a continuous process that prepares a vision of the future. This can be a subsidiary’s cash flow planning for a one week timeframe for example. It can also be the future balance sheet, income statement and cash flow statement for two merged organizations, used to assess the right price for a possible acquisition during a due diligence process.

This article only focuses on financial forecasting. It does not include Material Resources Planning or other kinds of operational forecasting processes.

Each forecast can be broken down into three main categories being financing, investing and operating. Depending on the type of organization and the markets in which it operates there will be different importance given to each of the categories. However, for a complete forecast all three categories need to be fully forecast otherwise the balance sheet, income statement and cash flow statement are not complete.

To correctly forecast the timeframe should be clarified before setting up a model. A forecast that spans 3 years, with monthly intervals is setup different than a cash forecast for 3 months on a daily interval. In each of the categories we will look at the impact of a long versus a short term forecast and share ideas on how to construct the numbers in the various categories.

In organizations wanting to combine long, medium and short term forecasts it is very advisable to cross check these with each other. This will show forecasting errors early on in the process. For example compare the short term cash forecast for next month with the same month in the long term forecast. Is the cash flow equal in both or is there a discrepancy? And if there is, what is the cause for the discrepancy?

Cross checking will greatly improve accuracy in forecasting and prevent that wrong decisions are made on wrong data.


Forecast reconciliation
Operating forecast

To start with the operating forecasting the main inputs are the working capital items accounts receivables, accounts payables and inventory. For a medium to long term forecast it is advisable to use days sales outstanding (DSO), days purchase outstanding (DPO) and days inventory outstanding (DIO). For short term forecasts aging lists from the accounts receivables and payables departments can be used combined with the raw inventory usage from the manufacturing department or finished products inventory from sales departments.

For the income statement operational revenue and costs must be forecasted plus the non-operational costs and the amortization and depreciation resulting from the investment forecast. It is important to include the non-cash items for amortization and depreciation to arrive at the correct balance sheet and income statement. It is also important for correct tax cash flow assessments in longer term forecasts.

Investing forecast

Investing forecasting consist of the asset purchases and divestments, changes in assets held for sale and asset retirements. Intangible assets should also be included. Based on these the amortization and depreciation schedules can be constructed.

Depending on the fact if the forecast is for a single entity within a group or it is for the entire group, intercompany transactions should be included or eliminated from the investing forecast.

Financing forecast

In the financing part of the forecast all transactions in equity and loan are included. Also dividend flows are part of the financing part.

This is the part of the forecast that mostly is prepared by the Treasury department in cooperation with investor relations after the operational and the investing forecasting are finalized. The Treasury can now determine if there is a need for additional cash or not and based on that can define the forecasted drawings or repayments on loans and its associated interest cost.

Forecast process

The forecasting process is a continuous process. The frequency of updates depends on the timeframe of the forecast. Longer term forecasts need less updating than short term forecasts. A decision needs to be made in all cases if the forecast is going to be a rolling forecast or that it is started from scratch each time.

In many cases the budget cycle in many organizations is still started from scratch every round instead of using a rolling forecast system. A rolling forecast system always has the same number of forecast periods within its full timeframe. After a period has ended, the forecast is updated with the most actual numbers and a new forecast period added at the end of the forecasting timeframe. An example may explain the workings. The forecast 2017FC001 contains 13 months being the actual year-to–date number of December 2016 and the forecasted months January 2017 until December 2017.

After period closing of January 2017 forecast 2017FC002 is created with periods Jan 2017 until Jan 2018 and is filled by the below actions:

  • Copy the actual numbers for January 2017 into the current forecast
  • Copy forecast data of months February until December from 2017FC001 (!) into the current forecast

After these actions the forecast data is ready for checking and updating. In organizations that apply a rolling forecast it is found that this method of forecasting consumes less time altogether than the static process. It also improves accuracy and reliability. Each period the organization checks progress against its targets can take action to make sure the targets are reached. It can be recognized much earlier in time if targets are unrealistic and will be overshot or unreachable. In these cases the targets can be reviewed and if needed updated without waiting for the next annual static forecast cycle.

Rolling forecast 001
Rolling forecast 002

The data in each forecasting is provided from various systems and departments. In a retail organization for example lots of data comes from the retail accounting and store information systems. In a logistics company much data is coming from the ERP systems. It is important to assess how the data is provided and if automation or central maintenance is required to lower the burden on departmental staff.

The forecast system itself can range from Excel to specialized stand-alone forecasting systems to integrated solutions in the ERP or Treasury Management Systems. The most important is that the forecast is available to those who need to provide input or that an interface is created to those input delivering systems.


Forecasting is an extremely helpful tool to help an organization making the correct decisions. There are many variables and questions in and around creating forecasts like which timeframes and periods to use, where to obtain the inputs, what systems to use and choose between a rolling forecasting or a static one to name a few of the obvious ones.

There are compelling reasons to develop a forecasting tool in your organization that will assist you in your decision making on every level. Feel free to contact us to make an appointment for an initial assessment workshop.