Cash & Working CapitalTechnology

Accuracy and AI: A New Cash Forecasting Tool Proves Its Worth

By February 17, 2022No Comments

HighRadius helps one company with thousands of projects and a complex revenue stream better forecast cash. 

A new tool to improve cash forecasting can be a tough sell to management, given the intangible returns. It becomes easier, however, if the solution improves accuracy by more than 50%, and even easier if the vendor contractually agrees to achieve a certain level of improvement or discontinue the relationship—no strings attached.

  • “It’s very hard to put a dollar amount on the positive impact of a cash forecast,” the treasurer of a company that had implemented a cash forecasting platform told members of NeuGroup for Large-Cap Assistant Treasurers.
    • “Our president once said to me, ‘So who cares if you’re wrong?’ But if that happens, he’s not happy about it.”
  • The treasurer detailed his team’s journey from Excel spreadsheets to HighRadius’ artificial intelligence driven platform. He said its use, limited to 2021, had performed well above expectations.

Remarkable results. The treasurer said the company had tracked its cash forecasting accuracy for years, and the new platform improved the three-month forecast net accuracy by 59% and the six-month forecast by 80%.

  • Net accuracy of the three-month forecast rose to 95% and the six-month forecast to 97%.
  • “What’s remarkable is that as you go out further it’s even more accurate,” he said. The company uses HighRadius for cash forecasts over the first six months, and for longer forecasts tacks on its traditional, top-down approach.

The challenge. The company concurrently runs more than 1,000 projects, each with numerous subcontractors that are paid at completion.

  • Each project essentially has its own “mini P&L.” If the cash performance of one out of five projects for one client wanes, it requires a deep dive to the invoice level to arrive at an accurate cash forecast.
    • “But treasury just didn’t have the resources to do that, so we had to find an automated solution,” he said.

Understanding the data. The company’s treasury team spent several months working with HighRadius to understand the data science and explain the company’s different cash flow categories and types of data, providing HighRadius with three years of invoice-level data.

  • In one instance, treasury initially sent over customer payment files, and HighRadius requested more detailed data at the project level.
    • “That was impressive stuff,” the treasurer said. “HighRadius figured out what data they needed from us and at what level; again, the process of really understanding the data.”

Applying AI. The company sends scheduled items such as payroll and debt service to the HighRadius platform, and its accounts payable (AP) and accounts receivable systems (AR) running data weekly automatically send that project level information. Meanwhile, the company’s banks send relevant data every 15 minutes.

  • AP and AR are the two components that are hardest to forecast, he said, and HighRadius’ technology determines the best artificial intelligence (AI) algorithm to use for each project.
  • “Now instead of a top-down forecast, you have the bottoms-up forecast you would do if you had the resources to do it yourself,” the treasurer said.

Cash management. After cash forecasting, the company implemented HighRadius’ cash management screen, enabling treasury to see current cash in the bank as well as investment values.

  • The treasurer said that cash management and forecasting are combined on one screen, providing holistic view of the company’s cash position.
  • “I know how much cash I have in the bank and based on my forecast I can see where I am at the end of the week, and then I can drill down and look a t that daily,” he said, adding that the weekly forecast is especially helpful, for example, on payroll weeks when the firms may have to borrower from its revolver.
Justin Jones

Author Justin Jones

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