Treasury is the beating heart of most corporates and has become a strategic partner for the chief executive officer (CEO) and other departmental heads. Often there is an urgent need for an immediate liquidity position across multiple global sites, different banks and multiple currencies. It can be very difficult to pull together this data, and the treasury department has to work hard to ensure there is visibility of cash, which is distributed across the entire global organisation.
Cash flow forecasting, therefore, is a vital aspect of the treasury function. Good cash flow forecasting reveals the potential liquidity constraints ahead of time, helping the treasury department pre-empt issues by using internal funds and/or securing appropriate credit lines and facilities in advance of any future unknowns.
Cash Flow Forecasting Post-financial Crisis
The current economic climate has brought efficient cash management into sharp focus. By being able to accurately map incoming and outgoing cash flows by compiling data immediately from across the business, treasury can ensure that the organisation is operating at maximum efficiency by adopting any necessary short-term funding measures. If teams know, for example, that there will be a surplus of cash in a week’s time, they can consolidate it into a central place and then invest it.
The focus on releasing internal liquidity has become the core of cash flow forecasting, as banks have become much stricter when providing funding to corporates. Corporates wish to use their own liquidity and be able to bolster subsidiaries that are lacking in funds with cash from other areas where it is more readily available.
Risk has become another priority along with its diversification and it is increasingly important to corporates not to have all of their eggs in one basket. Corporates need to ensure that risk is evenly spread and contingency plans are in place to ensure they properly mitigate risk.
It is important to remember that treasury can also increase returns and improve the cash position – at least this was the case prior to the 2008 financial crisis when interest rates were more favourable – and it is hoped that treasury will be able to do this again in the near future.
Difficulties in Cash Flow Forecasting
Treasurers frequently cite cash flow forecasting as a key area of improvement within their department and there are four key areas that can make accurate cash flow forecasting particularly difficult.
1. Organisational and cultural
A company, which is spread across various regions, has to deal with different time zones and, depending where the central treasury is located and where the cash flow is consolidated, there may well be some time-related issues. All relevant parties need to submit their cash flow forecasts in a timely manner and this presents a material challenge.
In order to create an accurate cash flow forecast, you need the knowledge of the local people, as they know the particulars of that specific business. They know when invoices are likely to be paid and when the cash inflow is coming. Making everyone in the business understand the importance of cash flow forecasting is therefore extremely important to balance this issue.
2. Cash flow uncertainty
Cash flows are not easy to predict, as sadly they are not always regular and consistent. Whereas cash outflows are easier to plan, as companies know when they have to pay tax, salaries or operational costs, cash inflows are much less certain because you don’t know exactly when your business partners and customers are going to pay. It is important to remember that your customers are operating in the same difficult market environments as you are and so therefore also trying to improve their own working capital.
Sales teams can assist with the prediction of inflows but often they can be a little more enthusiastic (and maybe a bit overstated) when promising revenue.
The third area that creates difficulties is long-term forecasting. A company knows better the funds it will have tomorrow, compared to what it will have in perhaps a month, three months or a year from now.
At the moment, it is estimated that around 70% of customers are carrying out cash flow forecasting using Excel spreadsheets. Many corporates who have a treasury management system (TMS) or a suitable module on an enterprise resource planning (ERP) system do not actually use the system for this purpose.
So why don’t they use the cash flow forecasting model of a TMS or ERP?
This is often due to the system not being implemented across all regions where the company has offices and increasingly because the cash flow forecasting module is simply too complicated for staff members to master without in-depth training, time and effort.
One thing is clear, companies still prefer Excel spreadsheets over TMS and ERP systems due to their ease of use. Many systems are simply too complex and include too many functions which make completing the cash flow forecast unnecessarily complex when so many bells and whistles simply aren’t needed. Excel spreadsheets, however, are prone to errors, have a high handling cost and also create problems for those companies listed in the US when reporting under Sarbanes-Oxley (SOX). SOX attempts to create operational control around the companies’ processes and Excel and other access databases are ‘user-developed’ applications, which are prone to error and do not allow for a full audit trail.
Collaboration Generates Accurate Data
The integrity of the raw data used for cash flow forecasting is critical to the accuracy of the forecast. One of the biggest difficulties treasury faces is collecting the right data and ensuring its accuracy once it is has been generated. In order to produce an accurate cash flow forecast, the treasury has to rely on a local subsidiary or business unit employees, that can be both structurally and physically remote from central operations. This can be challenging, particularly if those colleagues do not see an obvious benefit from providing this information.
As the ultimate starting point, it is critical to ensure the base data is correct and reconciliations must be carried out of the actual figures against the submitted forecasts to verify their accuracy. Feedback must be provided to the originator of the information to ensure the quality of the information improves over time. By providing useful feedback in this way, simple forecasting becomes a learning process.
It is paramount for all employees to understand the importance of cash flow forecasting for the organisation as a whole. Hence, communication channels have to be in place that allow for feedback, and this is particularly important when treasury needs to gain access to local information and local knowledge.
This process should ideally be supported by an easy-to-use system that acts as enabler to those carrying out the forecast, instead of adding further complexity or unnecessary functionality and hindering their progress.
An Integrated Banking Platform
The interface with the bank is a key element to ensuring that the corporate receives timely information, such as account balances, booking data and other positions. Receiving this information for a corporate can sometimes be challenging, but for a bank that deals with this data as part of their bread and butter business, it is much easier to provide this transparency.
Banks can make their customers’ lives easier by consolidating information and if they can also provide additional services and combine everything into one solution, then the client will further benefit. For example, the bank could add liquidity management solutions, such as pooling and cash concentration services, as a value add. By also adding investment and foreign exchange (FX) hedging services to the platform, they can create one easy-to-use interface which would help to manage risk and provide a more convenient process.
Many customers have expressed the desire for a one-stop solution that provides all of this information – not only Deutsche Bank-specific information, but also for balances with other banks worldwide, in one platform. Corporates desire a solid, integrated banking platform which is easy to use and combines seamlessly with their existing system landscape. By transferring data via a simple CSV file upload the process can be hassle free and without complexity.
In response, Deutsche Bank developed the Treasury Platform – an integrated liquidity management module on Autobahn, its electronic distribution service. This service offers, in one location, visibility of balances, forecasting, FX and investment services, allowing corporate clients to access their entire treasury and liquidity services needs through a single sign-on.
The Future of Cash Flow Forecasting
Cash flow forecasting has long been an area that corporate treasurers have sought to improve upon. They continue to stress that efficient cash management via enhanced accuracy of their cash flow forecasting remains a strategic priority. Yet, surprisingly, many are still using Excel spreadsheets to monitor this process.
However, a simple, accurate and timely cash flow forecast is vital for companies to achieve their information needs, support their risk management process and make optimum use of their funds. Getting away from the idea of a sophisticated treasury system can help solve this problem and the willingness to embrace more convenient, easy-to-use tools is essential.
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