The £660,000 Question: Is Your Cash Flow Forecast Failing You?

Published: December 04, 2024

An underestimated but very real threat is impacting company finances: unreliable cash flow forecasting. Agicap’s 2024 survey of more than 500 CFOs reveals just how damaging these inaccuracies can be. Think hundreds of thousands in unnecessary fees, lost revenue, and missed investment opportunities. But why are so many finance leaders still struggling to get forecasting right, despite significant advances in technology? And more importantly, what can they do to fix it?

Cash flow forecasting is a perennial bugbear. It’s been in the list of top treasury and CFO challenges in almost every industry survey over the last 15 years. Yet a surprising new study reveals that 37% of UK CFOs are still operating with unreliable cash flow forecasts, while 63% don’t even maintain short-term forecasts.

The financial impact of this is hard to ignore. In the UK, unreliable cash flow forecasts cost mid-size businesses an average of £660,000 per year. This figure includes £47,000 in overdraft fees, 91% more than what companies with reliable forecasts pay. In the US, the story is just as bleak. Businesses there are missing out on around $420,000 in potential financial income annually because of poor forecasting.

“It’s a concerning trend,” says Benoit de Angelis, Head of Content Marketing, Agicap, and the author of the research report, The 2024 State of Cash Flow Forecast Challenges in Mid-market Companies. “Given the current environment of still reasonably high interest rates and major economic uncertainties, CFOs and treasurers naturally want to have a firm grip on their cash flow forecasts. But our study presents a very different picture.”

The worry is not just the overdraft fees. “For a company making £50m or £100m in revenue, the costs cited above might not seem catastrophic. But when you look at net margins, which are often as low as 5%, the financial hit becomes severe. And the worst part – it’s all avoidable.”

An investment opportunity gap

The ripple effects of these costs extend beyond immediate losses. For example, UK mid-size businesses face an average of 14 unexpected cash shortages per year. What’s more, companies forced to hold excess cash as a buffer against unforeseen shortfalls also lose the opportunity to earn returns on that capital.

Beyond short-term investment misses, failing to manage liquidity well at a group level also means that treasurers and CFOs cannot self-finance growth effectively, nor can they unlock more debt on better terms. De Angelis adds: “We mustn’t forget that the main responsibility of the treasurer is liquidity management. But the best way to invest your cash usually is to reinvest it into your growth – especially as a mid-market company. And accurate cash flow forecasting is so important for this.”

The complexity dilemma

What, then, is driving this financial inaccuracy? And what can be done to close the forecasting gap? The Agicap study identifies several key challenges, with business complexity and reliance on outdated tools leading the pack.

“We looked at three different areas to properly assess the root causes of the inefficiencies,” de Angelis explains. “The number of legal entities per company, the number of bank accounts, and the number of currencies. For the latter, we counted a currency only if it represented at least 20% of the businesses’ flows, to ensure the impact was significant enough to matter to the results of the research.

“Our data shows that the number of legal entities has the most significant impact on forecast accuracy. The more complex the organisation, the harder it is to consolidate accurate cash forecasts. Interestingly, companies handling multiple currencies often manage better than those with numerous subsidiaries.” Specifically, companies managing more than 50 legal entities face an average gap of 29% between forecasted and actual cash balances.

Is Excel more dangerous than it looks?

One of the reasons that operational complexity creates forecasting challenges is a lack of standardised tools for tracking and monitoring – with different entities often using disparate systems, or not adhering to centralised approaches (even when asked)!

What’s more, despite the availability of sophisticated financial technology, many CFOs and treasurers still rely on Excel for cash forecasting. And while spreadsheets are versatile, they’re also fraught with risk. This isn’t just a European problem, either. The US survey data shows a heavy dependency on outdated tools.

De Angelis offers a telling example: “We worked with a company generating €300m in revenue, spread across 30 subsidiaries worldwide. Each subsidiary sent its cash forecast to the CFO every week. They then had to manually copy-paste these forecasts into a master Excel file. It was a logistical nightmare, and analysing variances was practically impossible.”

This reliance on Excel doesn’t just lead to errors – it creates a dangerous concentration of knowledge. “Typically, there’s only one person who really understands the model,” he points out. “If that person is unavailable, or leaves the company, the whole forecasting process grinds to a halt, exposing the business to severe operational risk.”

The integration conundrum

Another headache adding to forecasting woes is the lack of integrated forecasts, believes de Angelis. The study reveals that 78% of UK CFOs and 81% of their US counterparts do not integrate their long-, medium-, and short-term cash forecasts.

“Most CFOs work with the medium-term numbers, so the rolling 13-week cash flow forecast,” he notes. “As such, they don’t see all those losses on a daily basis because they lack a short-term cash forecast. At the same time, the long-term forecast is the only one where you can really act if you see an incoming issue. For the other two, it’s already too late.”

He elaborates on the timing implications: “It doesn’t necessarily mean that the company will go bankrupt if a significant issue does arise, but it means that they will likely have to use onerous short-term financing options. And any treasurer or CFO operating in today’s tough environment will want to avoid that at all costs.”

So, what’s the way forward?

Fostering a cash-first culture

According to de Angelis, while having the right technology in place, and access to real-time insights across the company, can make a world of difference, tech is only part of the equation. The real shift needs to happen within the finance function and across the organisation – through a combination of practical strategies and cultural shifts.

“Improving cash flow forecasting at a fundamental level is all about building a cash-first culture,” he explains. “Typically, there is an accounting culture more than a cash culture because people within finance are often trained in accounting, rather than cash.”

Shifting the approach to ensure cash is truly king means that finance leaders need to be proactive, not just reactive to crises, and planning ahead by making data-driven decisions. After all, businesses that can predict their liquidity accurately are in a stronger position to withstand market volatility and seize growth opportunities when they arise. “And having the right culture in place is the best place to start when working towards this goal,” he notes.

• Engage subsidiaries and standardise credit terms: “One of the quickest wins is to get your subsidiaries involved in cash forecasting at a granular level,” de Angelis advises. “Only about one-third of companies do this well. Working with your subsidiaries and harmonising credit terms with suppliers can improve forecast accuracy considerably.”
• Address sales forecast discrepancies: Finance leaders should engage proactively with sales teams. “Sit down with your salespeople and make sure payment terms are realistic,” he says. “Discuss what’s achievable and ensure these terms are in sync with your cash flow planning. Misalignment here is often a major pain point.”
• Integrate short-, medium-, and long-term forecasts: “You need all three types of forecasts to see the full picture. Short-term forecasts show you immediate risks, while long-term forecasts help you plan for strategic financial events. Without this integration, you’re always in reactive mode.”
• Leverage real-time data where possible, but don’t overlook basic practical solutions: While implementing new software can be costly and time-consuming, the benefits of real-time cash management tools are clear. “Real-time data is a game-changer,” he says. “However, even if you don’t have the latest tech, there are still meaningful improvements you can make. Calling suppliers to renegotiate terms, reviewing historical sales data, and setting up simple variance analysis processes can make a huge difference.”

Making positive changes

One of the most effective ways to begin the cultural transition around cash flow forecasting is to have candid conversations across the organisation. “The findings of our study are proving particularly valuable for CFOs and treasurers looking to drive change. Our customers have been using the statistics to educate their CEOs or their managing directors on why cash forecasting is important for the company to take seriously.”

To this end, the team at Agicap is also busy writing an e-book on best practice for cash flow forecasting (stay tuned). “Of course, we are not reinventing the wheel here,” admits de Angelis. “We will not see a new method of forecasting suddenly pop up alongside the direct and indirect methods! But what will change, and what we are busy talking to CFOs and treasurers about, is that the distribution of innovation is shifting. In other words, the barriers to accessing technology tools are now lower than ever before. This makes it much easier to integrate the different types of cash forecast into a single tool, and take back control.”

For mid-market companies looking to improve their forecasting accuracy, the path forward involves embracing modern tools that can handle business complexity while enabling better collaboration across the organisation. The potential financial reward – £660,000 in annual savings and additional income in the UK, and even more in the US – makes a compelling case for change.

De Angelis concludes: “Ultimately, improving cash forecasting isn’t just a finance project, it’s a strategic priority. The overall goal is resilience, agility, and making your business as strong as it can be. The costs of inaction are too high, and the opportunities for those who get it right are too significant to ignore.”

To discover more insights on the pitfalls of poor cashflow forecasting, and how to avoid them download The 2024 State of Cash Flow Forecast Challenges in Mid-market Companies report free of charge.

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