Cash flow forecasting has always been and will continue to be one of the most important tasks associated with minimizing liquidity risk. Best practice organizations confidently execute and deliver accurate cash flow forecasts, typically through five key disciplines:

Top down initiatives
Senior executives need to mandate forecast performance and identify for key staff the strategic value of forecasting for the organization. Otherwise, forecasting will become too burdensome and staff will just go through the motions.
Data source identification
It's crucial that an organization identifies the most relevant data sources that become the inputs to the forecast. Common areas include:
- Subsidiary/business unit forecasts.
- Maturities of financial instruments (FIs).
- Historical actual transactions.
- System imports such as accounts receivable (A/R), accounts payable (A/P), budget systems, payroll, etc.
Automated data source consolidation
Organizations often spend way too much time just trying to bring this information together. This leaves no time for validation and analysis. Automation from many to one is key.
Reconciliation and performance testing
Creating a forecast is just the first step. Forecast adjustments are critical and can only be done effectively with good intelligence into how your forecasting compares to what actually happened. Improvement can only be made when you realize what moved against you. About 80% of the time dedicated to forecasting should be spent on forecast accuracy testing and adjustments.
Scenario testing
After forecasts have been checked against actuals and the adjustment process has been honed, it's time to run scenarios. This enables the organization to understand and plan for liquidity risk situations that may arise in the future. Common scenarios used by world-class forecasters include: FX shifts, interest rate shifts, best case/worst case shifts, adjustment up or down by a given percent, and shocking large inflows or outflows of the forecast.

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Liquidity Risk Management Best Practice

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