Empowering cash managers to achieve cost savings by improving predictive accuracy

Abstract

Cash management is concerned with optimizing a company’s short-term funding requirements. To this end, various different optimization strategies have been proposed for minimizing costs, using daily cash flow forecasts as the main input to the models. However, the effect of the accuracy of such forecasts on cash management policies has not been studied. This article uses two real data sets from the textile industry to show that the predictive accuracy is highly correlated with cost savings when daily forecasts are used in cash management models. A new method is proposed to help cash managers estimate whether their efforts in improving the predictive accuracy are rewarded by proportional cost savings. Our results indicate the need for an analysis of the potential cost savings derived from improving the predictive accuracy. On that basis, the search for better forecasting models is in place in order to improve cash management.