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.
The regularity of forecasting must be the same across the organisation, although this next step is not without its challenges, requiring buy-in from all subsidiaries and the ‘bottom-up approach’ to internal reporting throughout the corporate.
This type of approach, which should permeate every operation throughout the firm on a regular basis in a standardised format, is essential to provide the necessary snapshot. We have heard from one treasurer that he linked regular and accurate forecasts to remuneration within the organisation to encourage adoption.
The easiest way to facilitate buy-in and standardisation of information is via online platforms with standard forecasting templates. Whether using existing reports generated by a corporate’s billing or invoicing system, bringing in sales forecasts, pipeline information and mass payment and receivables files, forecasting is required for each of these.
Additionally, confirmation messaging generated for investment, debt and foreign exchange (FX) contracts, which includes maturity information, helps the corporate to gain an accurate picture of where its cash lies.
Reconciliation, variance analysis
The final step of cash flow forecasting is also the most challenging.
The information gathered from across the organisation must include pending, forward-value, and booked transactional information in order to help the reconciliation process. This is essential when testing the accuracy of the forecast by comparing it to the actual figures.
Daily transaction and balance information, along with inflows and outflows broken down by transaction types, which aided visibility during the initial step, are critical to the accuracy (variance) analysis. A cash positioning worksheet for one, two or three days ahead offers a short-term comparison to help kick-start the discipline.
While enterprise resource planning (ERP) capabilities help to centralise information, there are bound to be disparities among various subsidiaries of a business, a variety of local banks and a host of different platforms, as highlighted earlier.
This is providing a greater impetus for corporates to ensure their local-currency cash around the world is accessible, can be converted easily to a base currency, and used to provide internal funding, not only to meet their diverse needs but to also enable cash to be recycled.
A standardised global model ensures that a corporate can automatically upstream its cash, where appropriate, into a centralised hub and then use the funds across any territory.
With information and cash flow forecasting facilitated, treasurers can gain an accurate snapshot of where their cash lies. This is especially significant post-crisis, given that the preservation of capital and liquidity drives business growth.
With today’s elevated costs of funding, with credit being both expensive and constrained in many markets, cash is once again king. By optimising an accurate cash flow forecast, a corporate treasurer can demonstrate when funds are needed and for how long, knowing that sufficient cash is available.
About the Author
Ahmet Bulutoglu is Senior Product Manager for Global Liquidity Product, EMEA, at Bank of America Merrill Lynch.