Cash Forecasting And Liquidity Risk

Reviewed by Fallon Han· Updated 2026-06-01 21:30:02.158

This conversation was generated using Cook'd AI's career assistant and reviewed by Fallon Han from our editorial team for accuracy.

I'm moving from accounting into treasury at a public company in Australia, and I keep hearing about cash flow forecasting. Can you explain how a company actually predicts its cash needs, and what usually makes those forecasts go wrong?

Absolutely. Treasury forecasting is really about mapping expected inflows and outflows over time, then stress-testing the assumptions. A simple forecast usually starts with three layers: - Customer receipts: when sales invoices are expected to be collected - Supplier and payroll outflows: when payments actually leave the bank - Known financing items: debt repayments, tax, capex, dividends, FX settlements The important part is timing, not just accounting profit. A company can be profitable and still run short of cash if receivables slip, inventory builds, or a large payment lands earlier than expected. Forecasts go wrong when the assumptions are too static. For example, a common issue is assuming customers pay on average terms, but in a downturn they stretch payment from 30 to 60 days. Another is ignoring working capital seasonality, like a retailer building inventory before peak sales. Treasury teams usually manage this by building weekly short-term forecasts, comparing them to actual cash movement, and flagging big variances early.

That helps. When you say working capital swings, what are the biggest ones I should watch for in a public company, and how do treasury teams separate a normal swing from a real liquidity problem?

The main working capital drivers are receivables, payables, and inventory, plus sometimes tax and bonus payments. Here is how they affect cash: - Receivables rising means cash is trapped longer - Inventory rising means cash has been spent before the sale happens - Payables rising can temporarily support liquidity, but only if suppliers stay comfortable Treasury separates normal swings from a liquidity issue by asking two questions. First, is the movement seasonal or structural? A seasonal inventory build ahead of Christmas is normal if it unwinds later. A permanent increase in DSO from 45 to 70 days is a warning sign. Second, is the company still above its headroom? Treasury looks at available cash, undrawn facilities, covenant room, and forecast minimum liquidity. If a swing pushes the company close to the floor, it becomes a funding issue, not just an operating one. A good example is a public company that wins a large contract. Revenue looks great, but if milestone billing is slow and upfront project costs are high, cash can dip hard before collections catch up.

If I were building a forecast for treasury, would I use direct cash forecasting or start from the P and L and adjust it? I am trying to understand what public companies actually prefer.

In treasury, the preference depends on the horizon. For near-term liquidity management, direct cash forecasting is usually better. That means forecasting actual bank movements from known receipts and payments. It is more useful for the next 1 to 13 weeks because you care about day-by-day liquidity. For medium-term planning, many teams also use an indirect view, starting from EBITDA or profit and adjusting for working capital, capex, tax, and financing flows. That helps explain the bridge from earnings to cash over months or quarters. Public companies often use both. - Short term: direct forecast for payments, collections, payroll, tax, debt, and FX - Medium term: indirect forecast for strategic planning and funding decisions The trade-off is accuracy versus effort. Direct forecasting is more operationally precise, but it needs good data from AP, AR, payroll, and the business. Indirect forecasting is simpler at a higher level, but it can miss timing issues. If you are interviewing for treasury, it is strong to say that the best approach is layered forecasting: daily or weekly for the near term, then a monthly rolling view for longer liquidity planning.

What are some concrete reasons the forecast can break down in real life, especially around payments and collections? I want examples I can talk through in an interview.

A few very practical failure points come up again and again. 1. Collections are assumed to arrive on standard terms, but customers pay late. Example: the forecast expects a major customer to pay in 30 days, but they query invoices, withhold disputed amounts, or simply extend payment to preserve their own cash. 2. Supplier payments are not matched to the forecast calendar. Example: AP may run a payment batch earlier because of month-end cut-offs or supplier negotiations, so the cash leaves a week sooner than planned. 3. One-off items are missed. Example: tax instalments, dividend payments, insurance renewals, lease settlements, or bonus payments can create large outflows that are easy to overlook. 4. Intercompany or FX cash flows move unexpectedly. Example: an overseas settlement or hedge margin call can create a cash drain that is not visible in the local operating forecast. 5. Operational teams do not update assumptions. Example: sales signs off on strong collections, but no one updates treasury when a major customer delays payment. In an interview, you can show judgment by saying treasury forecasts fail when they rely only on static averages instead of live business inputs and exception reporting.

How do treasury teams manage liquidity risk when they see a gap coming? I am especially interested in the practical response, not just the theory.

The response is usually staged, from least disruptive to most formal. First, treasury confirms the size and duration of the gap. Is it a one-week timing issue or a three-month funding need? Then they look at available levers: - Accelerate collections through tighter credit control or customer follow-up - Delay non-essential capex or discretionary spend - Negotiate supplier terms if commercially possible - Use existing cash and undrawn committed facilities - Rebalance cash across entities if there are restrictions and approvals - Hedge or unwind FX exposures if those are driving volatility If the gap is persistent, treasury escalates to financing actions such as drawing facilities, refinancing, or raising additional liquidity. The key point is that liquidity risk management is not just borrowing money. It is about preserving optionality. Good treasury teams want enough headroom so they are not forced into expensive or damaging decisions under pressure. For a public company, that also means keeping management and the board informed early, because liquidity becomes a governance issue fast.