Published: January 07, 2025
With an uncertain economic outlook projected for the coming year, having a robust cash flow scenario modelling and analysis capability is essential for corporate treasurers. Collaboration with other finance functions and embracing smart technologies can unlock greater insights into how corporate cash might be protected in this volatile environment.
As corporate treasurers head into 2025, a host of global challenges looms, threatening to disrupt cash flow and liquidity. From geopolitical tensions to economic uncertainty and shifting financial markets, these headwinds will put pressure on corporate cash flow scenario modelling.
As Sourabh Verma, Head of Treasury Product Marketing, ION, acknowledges: “There is no respite in the war in Ukraine or the Israel-Gaza conflict. Any further escalations remain a key risk. Compounding this is the fragile situation between China and Taiwan, which could disrupt global supply chains and significantly impact the semiconductor industry.”
Tariffs look likely to rise under the new Trump administration, and global GDP could take a hit. China’s economy, already grappling with slowdowns, could drag down demand for key commodities such as copper. “Upstream producers are already considering this as a key risk,” Verma notes, highlighting how commodity-driven businesses face heightened threats.
On the flip side, safe-haven assets such as gold and silver may offer some respite. Treasurers should reassess their risk management strategies, especially those with significant exposure to precious metals.
Inflation remains a wild card in the outlook for 2025. After cooling earlier in 2024, recent data shows a resurgence, with October’s Consumer Price Index (CPI) rising 2.6% year-on-year. While the US Federal Reserve has already cut rates by 75 basis points, future moves will hinge on inflation data.
“The Fed is data dependent,” Verma explains. “It is balancing the dual mandate of price stability by targeting a 2% annual inflation rate and maximum employment.” If inflation persists, interest rates could stay elevated, adding pressure on companies reliant on cheap borrowing.
Currency fluctuations also pose a significant challenge. The U.S. Dollar Index (DXY) hit 107 in November, bolstered by market optimism following Trump’s election win. However, a correction may be imminent.
“For companies with USD exposure, now is the time to hedge,” advises Verma. “Locking in favourable rates could shield against a potential dollar slide in 2025.”
Such proactive measures could make or break a treasurer’s ability to manage currency risk effectively. Accurate cash flow forecasting is also an essential piece of the puzzle, helping treasurers to navigate these turbulent waters.
Steve Wiley, VP Treasury Solutions, FIS, outlines: “With parts of the world either in recession or on the verge, treasurers need tools that offer greater precision. Those who can predict cash flows accurately will have a significant advantage.”
Amid rising uncertainty, liquidity planning takes centre stage. Treasurers must leverage data-driven tools and adopt agile strategies to stay ahead of market shifts.
“Those who do it better will emerge stronger on the other side,” Wiley emphasises.
All the headwinds gathering for the coming year will offer a significant test of corporate cash flow scenario modelling and analysis. A key challenge for treasurers here is understanding what the right parameters are to set for their specific organisation.
“The rubber meets the road here when it comes to data,” says Wiley. “For us as a technology provider, the Holy Grail is being able to predict cash accurately, a week out or 30 days out.”
Treasurers need comprehensive data from across the business, including operations, AR/AP, and M&A. “In order to enable a forecast, a treasurer has to obtain good-quality data,” Wiley explains. He also highlights the importance of accountability: “They need to perform variance analysis when it comes to that forecast and hold someone accountable with reliability.” Without these steps, even the most advanced technology will fall short.
Brett Turner, CEO and Founder, Trovata, highlights that forecasting challenges often stem from data limitations rather than interface design. “With scenario modelling and forecasting, it’s not a UI [user interface] issue, it’s a data issue. Sourcing datasets regularly that are rich and reliable is nearly impossible without modern tech and cloud-native infrastructure. Most people are doing their data transformation in Excel, which limits the scale and repeatability.”
Once data is gathered, the challenge shifts to maintaining its relevance. “The challenge is that it is basically obsolete by the next day,” Turner notes. “It might hold up for another week or two. And then after that, what treasury really needs to do is be able to refresh all the datasets. That is the hardest part.”
Even when data is accessible, building effective models is a specialised skill. If treasury does have someone who is good at building scenario models and they later move on to another company, that will leave a considerable skills gap that will need filling.
“If nobody else understands it, the firm has to hire somebody in, and that person will build it all over again because people only trust what they’ve built themselves,” Turner reflects. “Reliance on what the model says is so high that integrity becomes critical.”
Cash forecasting and financial modelling then start to reflect human nature – people become the process. “Bespoke models, built out of perceived necessity, create a pattern of reliance that makes it hard to move beyond the way things have always been done,” Turner adds.
For treasurers relying on basic tools such as Excel, the level of sophistication achievable in their scenario modelling and analytics may be capped, but there are some steps that can help.
Verma extrapolates: “It’s customary to consider three scenarios using spreadsheets: best case, worst case and base case. For the best-case parameters, it’s common for companies to assume a 5% to 25% range in terms of improvement, and then in a worst-case scenario, to assume a 5% to 30% decline in revenues or an increase in cost.”
The key is tailoring assumptions to the specific business context. “If the company is operating in a market with a stable demand, such as consumer staples, for example, then creating a best- or worst-case scenario with 30% variation is probably not a good idea,” Verma advises. “If historic data shows cash flows fluctuating 5% to 10% in terms of volatility, there’s no reason to model a 35% increase or drop in demand.” Conversely, in high-risk or cyclical industries, such as commodities, more extreme scenarios may be warranted.
New and emerging technologies are helping treasurers to enhance the sophistication of their scenario modelling and analysis. One high-profile example of this is AI, which is transforming the way treasurers predict and manage cash flows. Deloitte’s Global Treasury Survey 2024[1] found the top two expected impacts of generative AI (GenAI) on corporate treasury to be on cash flow forecasting and cash positioning.
Gone are the days when forecasting meant relying on simple historical averages. AI now enables treasurers to analyse vast datasets, providing deeper insights and more accurate predictions.
Wiley predicts: “In the next 12 months, we will see an emergence of stronger simulation and modelling tools, which look at historical data and can predict cash with more accuracy.”
With GenAI, the possibilities expand exponentially. Turner envisions a future where treasury teams can run hundreds or thousands of scenarios in seconds. “Whoever has the best tools, the best data, and the best technology is going to have superior scenario modelling. It is what happens in the tech world, but is not yet happening in the treasury world – but it will.”
APIs are also playing a crucial part, specifically around data integration, a critical component of modern treasury operations.
Verma enthuses: “The biggest benefit of an API is the near real-time flows of data. With the right integration, treasurers can easily have the inflows and outflows of data.”
Running cash flow scenario modelling is all about the data. Treasurers may have issues refreshing the data quickly if it takes too long to get all the relevant datasets, but technology is solving that problem. APIs are making data richer and faster, coming from across the organisation and also from the banks. This speed and accuracy enables treasurers to run multiple scenarios rapidly.
Turner summarises: “It’s all about volume – the more scenarios treasurers can run, the more they can assess. This gives them the ability to eliminate certain outcomes, understand the risk of different scenarios and really home in on their risk thresholds.”
AI, APIs, and automation are redefining cash flow scenario modelling, offering new ways to manage risk and optimise liquidity. But the success of these tools depends on treasurers’ ability to integrate them effectively.
Wiley affirms: “The tools are there. It’s up to treasury teams to use them effectively and ensure they’re working with good data.”
With technology offering unprecedented access to data, analytics tools, and scenario modelling capabilities, a new era of cash flow optimisation is emerging – one where treasurers can boost efficiency without taking on additional risk by leveraging historical data more effectively.
Turner posits: “If treasurers can look at all of their history in a more extensive way, it gives them far more comfort when it comes to looking forward. Because there can be new outcomes with which the treasurer is not familiar.”
This backward-looking approach isn’t just about reassurance. Analysing historical data can reveal vital trends and insights. “It’s possible to learn all kinds of things that are happening in the business from that historical data that treasury didn’t even realise before,” Turner adds.
A critical point of forecasting differentiation for treasurers is the type of data they use. Treasury teams rely on bank data, while other finance teams typically use ERP data.
“Treasury uses bottom-up forecasting because it’s using bank data,” asserts Turner. “Finance and FP&A personnel are using ERP data with a lot of accruals, so they have to make a significant number of timing adjustments and assumptions.” This often leads to competing forecasts within the organisation, forcing CFOs to pick and choose between them.
Now, though, technology is bridging that gap. “By integrating precise bank data into broader financial planning processes, treasurers can provide insights that CFOs value – such as capital efficiency and cost management – without the need for excessive hedging,” Turner states.
On the risk management side of scenario modelling and analysis, visualisation techniques are helping treasurers gain a better handle on the challenges their organisation may face.
Verma explains: “Treasurers need to first assess the risk exposure by identifying and measuring the various financial risks that could impact liquidity, profitability, and overall financial stability. Once they’ve done that, they then need to assess which are the needle movers for their specific situation. Cash flow scenario modelling ultimately helps create a risk heat map.”
A heat map enables treasurers to visualise and prioritise risks, identifying the top factors that could impact cash flows. A heat map can provide the insights to support treasury risk mitigation decisions. By focusing on the most significant risks, treasurers can target their mitigation efforts more effectively.
“If something is immaterial or insignificant for the specific company, where it’s not going to usually influence treasury operations or predictability of cash flows, then maybe the treasurer doesn’t need to take any risk mitigation measures,” Verma adds.
Despite the availability of advanced cash flow scenario modelling tools, many organisations have yet to fully embrace them.
Wiley notes the surprising underutilisation of these technologies: “Reports have shown there are still real challenges around visibility to global liquidity. That surprises me today, where we have Swift for Corporates, multi-bank reporting tools, and cash flow scenario modelling embedded with treasury systems.”
For those treasurers who do leverage these tools, the benefits are clear. “These absolutely work wonders for those that use them,” Wiley adds.
Treasury departments will be at a crossroads in 2025, with growing expectations to leverage advanced tools including GenAI and scenario modelling. However, many treasurers remain cautious.
Verma emphasises: “Cash flow scenario modelling is so important, but I don’t see a large number of corporate treasuries implementing this. Start simple. Focus on structure, assumptions, and data accuracy.” Accurate inputs, he notes, are critical for meaningful outputs.
Turner sees change as inevitable, driven by CFOs who are increasingly focused on AI’s potential. “Treasurers can feel the pressure,” he notes. “Their CFOs may say they should use GenAI, and while treasurers might be initially sceptical, the CFOs are right in terms of where things need to go.” The solution? Modernising legacy systems, embracing cloud-native technology, and fostering collaboration.
Treasurers should also expand their horizons, says Turner. “Treasury is going to be a superpower when integrated with the CFO’s vision. Treasurers need to ask: ‘Am I driving value for my CFO every day?’”
As treasurers navigate their course, it would also be wise to make an effort to get to know some of the people in FP&A, accounting, or the CFO themselves, and start asking questions around what they would find valuable. Being open to collaboration means treasury will be included more and gain greater understanding of the overall business requirements.
“Shared discovery is where the magic happens,” Turner concludes. “When treasury and these other functions are working together, they break down the barriers that exist between the many finance functions and workflows. Either by choice or by necessity, accounting, FP&A, and treasury will become one tightly integrated department within the next seven to 10 years.”
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