How to Optimise Your Cash Flow Forecasting

by Ahmet Bulutoglu, Bank of America Merrill Lynch, 28 July 2011

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topics:
Cash and Liquidity Management Finance and Banking

tags:
cash flow forecasting cash management cash visibility treasury management variance analysis

In a recent client survey, cash flow forecasting came out as top of mind for corporates. This finding highlights the fact that cash flow forecasting is an area that treasurers are increasingly striving to better understand, in order to improve their handling of this process and positively impact their organisation.

Much has been written about the impact of the recent financial crisis and how it not only changed the global treasury business and banking landscape, but, for the corporate treasurer, how it highlighted the importance of timely visibility and control over enterprise-wide cash. Yet, to a large extent, visibility and control remain an unaddressed issue for a large number of treasurers.

The need to initiate an internal source of funding growth, adequate management of working capital and the creation of efficiencies by higher velocity of cash across receivables is ever more crucial. Never before has it been so imperative to have money in the right place at the right time, not just for today’s operations, but for future commitments too, when external sources of funding may be perhaps too expensive or more difficult to secure.

Today, companies need to look at policies and procedures across their whole organisation to ensure they have full visibility and control of their cash balances globally in order to optimise working capital. To this end, treasurers are increasingly seeking integrated worldwide solutions to their cash and liquidity management challenges that reflect this enterprise-wide approach to post-crisis risk.

Best Practice Steps

By breaking the process into achievable steps, corporates can work with their bank to evaluate the effectiveness of each stage to help ensure best practice around cash flow forecasting.

These steps are:

Achieve visibility of operational cash
Encourage regularity of forecasting by business entities and subsidiaries for a bottom-up approach
Undertake reconciliation, cash positioning and variance analysis

Businesses have become increasingly global and this has led to further complexities. Bringing together the nexus of banking relationships across the globe, as well as joining together every business operation and subsidiary, no matter how siloed, is critical to enabling global visibility and uniformity.

Visibility of operational cash

Even when corporates have many bank relationships across different countries, they can use their overlay bank to help with visibility in their daily transactions and cash balances.

Standard reporting that can be plugged into corporate enterprise systems or bank platforms which are automated and monitored is essential in giving treasurers readily-available information. This allows them to provide meaningful analysis, rather than acting as mere data gatherers.

The information becomes more valuable if transactions are categorised by payment or receivable type in the same or similar format to how treasurers intend to forecast. Not only is this an achievable first step on the road to cash flow forecasting, it also creates a historical picture and a record of cash flow cyclical variations.

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