Even as treasury teams evolve to take on more strategic roles, their core responsibility remains the same: to know how much money a business has, where it’s held and how to maximize use of funds so the business gets the most out of its money.
To gain insights into liquidity, treasury needs a well-defined approach to cash positioning and cash forecasting. These processes—which are distinct but closely related—are essential to daily financial operations and decision-making for companies of all sizes and structural complexities.
At a high level, cash positioning and forecasting can help businesses maximize investments, minimize expenses, map out expansion plans and much more.
Cash positioning is the practice of aggregating daily account balance and transaction information in a single place to ensure there are enough funds to cover daily operating needs. That may be an Excel spreadsheet or treasury management technology that includes tools for cash flow planning.
Why is it important? The value of cash positioning can be expressed on two levels:
What does the process entail? Many businesses use Excel for cash positioning, even billion-dollar companies. That means every business—regardless of its size—has the ability to conduct daily cash positioning.
To start, here are some things to consider:
Identify all accounts, including those used for payroll, domestic and international operations, or by specific business segments. Prominently showing key accounts with the most activity is best practice.
Create a worksheet or template that reflects how your business manages your cash and funding. Determine the right level of detail necessary to create the position without making it an onerous process.
Aggregate critical data such as opening and available balances, expected inflows/collections and expected outflows/payments, potentially categorized by transaction type.
Leverage technology solutions to automate the data pulls from both your bank and your internal systems.
The resulting current visibility into liquidity helps allow companies to:
Excel can be sufficient for cash positioning in some situations, but it can also be time-consuming. As your business grows or adds complexity or more accounts, you may want to explore ways to automate cash positioning and mitigate risk, save time and free up personnel to do more valuable tasks than manual data entry. Options may include:
It’s a way to estimate future cash levels over a specific and longer period of time using anticipated inflows and outflows.
These forecasts can be used for short- or mid-term planning, and assist with treasury objectives like debt management, funding, cash repatriation, investment and enablement of business growth.
There are two general approaches to cash forecasting:
Forward-looking cash flow projections can help companies accomplish a number of goals, including:
Short-term and mid-term strategic planning: Planning on new market expansion? A new product line? Share buybacks? Cash forecasting can provide the liquidity baseline needed to carefully plan for these efforts.
Optimized cash usage: Cash forecasting can help companies more accurately determine whether they have sufficient cash available. With this information, treasury can more efficiently deploy or pool funds so that cash is not sitting unused or trapped in complex structures.
Foreign exchange insights: Cash flow forecasts help companies examine their short-term foreign exchange exposure. This, in turn, allows them to prepare for FX volatility and mitigate "trapped cash" risks.
Contact J.P. Morgan or your banking relationship team for more information about our treasury services and how they can help your cash positioning and forecasting efforts.
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