Easing corporate treasury’s headache – value-add cash flow forecasting

Cash flow forecasting has traditionally been a priority for treasurers, but always important rather than urgent. Somehow it never makes it onto the ‘completed’ list, as the treasurer’s focus gets waylaid, and he/she exercises their agility moving from battling crises to complying with new regulations. We know since the 2008 financial crisis, liquidity risk is real. Cash flow forecasting is not only about predicting the future, but also about having the right data at your fingertips to analyse the impact of a catastrophic event when it happens.

Why is now the right time for cash flow forecasting?

Treasury is a fairly recent addition to the business palette of activities. It is a function that has developed and matured gradually over the past 20-30 years. The main focus of a new treasury is on essential tools such as bank accounts, liquidity structures, dealing and payments processes and setting up so the daily operations can flow. Companies grew complacent in the “boom” years and neglected on forecasting for their global silos of cash. Instead it proved easier to borrow from banks, rather than invest time and energy into building robust cash flow forecasting models and processes to get a global view on expected cash flows.

With current low-to-zero interest rates, the cost/benefit of proper cash flow forecasting may not seem justifiable for corporates with good access to credit and capital markets. However, after an event such as the fall of Lehmann Brothers, it is clear that treasurers can no longer ignore liquidity risk. Our world currently presents a volatile environment: major economic and political surprises such as Brexit, the Greek sovereign debt crisis, an unstable oil price and unpredictable world economy in general are events the treasurer deals with on a daily basis. They can stress test corporate cash flow at any time.

Against this backdrop, corporates with a mind-set on cash that are able to “think in cash flows” enjoy a better position for survival than others. Forewarned is forearmed, as the saying goes. Cash flow forecasting has become essential, not just important.

If done correctly, the forecast would signal change in the business and the implications at an early stage, providing time to react and take corrective measures. It also allows for sensitivity analysis given macro-economic changes.

It was once said in a conversation with the treasurer of a large multinational “The benefit of having it right doesn’t outweigh the effort of getting it right” Is this really true?

Adding value to the business

Treasury is now well established in organisations and therefore has the opportunity to play a value-add role to the business. Cash flow forecasting is a manifestation of this value-add role. A reliable cash flow forecast is invaluable in comforingt the treasurer. It provides essential information to understand and discuss the health of the business:
• Increased insight into the main sources of in and outflows.
• Time to plan and save avoiding unnecessary borrowings.
• Currency exposure forecasting provides the basis for effective foreign exchange (FX) risk management.
• Ability to identify improvements to increase working capital effectiveness.
• Deviations indicate changes in the business

Treasury is affected by multiple forces outside its influence. Structural changes in Europe, a massive regulatory shift and focus on control, Basel III’s discouragement of banks to accept non-operational cash deposits, money market fund (MMF) reform, and the European Central Bank’s (ECB) monetary easing giving rise to ever more negative interest rates force treasury to operate in unchartered waters. FX market volatility adds fuel to the fire. This changing environment calls for more time to be spent on analysis of the forecasting data and less time on doing the actual forecasting.

Why is it such a headache?

The reasons cited by treasurers come down to one key word: ease. Treasurers find cash flow forecasting difficult, ineffective and even impossible.
• Data collection and harmonisation: Reliable source data presents a critical stumbling block. Format, templates, harmonization and labelling requirements are all diverse. The timing and coordination of data collection is challenging. Often the local business does not understand the need for – or has little incentive to provide – the information; resulting in low data confidence in the final forecast. Ultimately internal and external reporting requirements are not fully satisfied;
• Systems: Even today, Excel is often used where complicated one-off macros can enforce caution to change. Invariably there are unintegrated enterprise resource planning (ERP) systems, or manual input into the treasury management system (TMS). Cash flow forecasting systems may provide only limited functionality other than aggregation of source system data;
• Reconciliation: Direct versus indirect forecasts.
• Analysis: Forecast versus actuals, forecast versus forecast, understanding predictability and scenario analysis.

The solution

Today’s age of digitalisation and sophisticated tooling means that treasurers can now get real value out of the effort put into implementing a robust, accurate cash flow forecasting process. Business Intelligence tooling available makes it easy to consolidate business unit submissions in a uniform timely way and provide a simple specified line item or high level forecast views. Creating awareness and educating the business on the importance of accurate source data can go a long way, as can making it an incentive driven deliverable by attaching key performance indicators (KPIs) to data accuracy. These methods are proven to work.

The business case for a cash flow forecasting tool is grounded on the belief that the tool provides users with time to analyse the forecast rather than actually constructing it, achieving business value adds:

1. Avoiding liquidity shortages through greater visibility over the current and future cash position and cash flows.
2. Reducing debt and interest costs and/or increase interest income through efficient cash management.
3. Gaining operational efficiency through automation of tasks and processes.
4. Better understanding of the risks of certain cash flows and currency positions.
5. Early warning about change in business patterns and its impact on business financials.

A one-time effort spent in automating and standardising the forecasting process is an investment in the business wisely spent. Helping the business to “think in cash flows”, focus on accuracy, reduction of time and error-prone manual entry can produce clear cash (and non-cash) savings.

Traditional solutions for cash flow forecasting:
 Specific TMS modules.
 ERP integrated forecasting tools.
 Specific cash flow forecasting software or cash management tools.

These tools can interact with different systems, automate the collection and consolidation of data, perform basic ‘what-if’ scenarios and standard reports. Most act well as data collectors, can integrate value dating and categories, then aggregate cash flow information. Functionality, however often remains limited.

Most recent ERP solutions are capable of good cash flow forecasting, but most functionalities are based on BI technology or performance management tools from the same vendor. One key advantage is that they usually come with good data integration to the different cash flow sources with the ERP. A bottleneck however can be the data integrity in the ERP; often legacy entries resulting from non-standard processing of transactions and non-cleared balances clutter the reports. A data “clean up” exercise can be requested before reliable data can be used for the forecasting process. It is also important to consider the number of different ERP solutions within the business, from different vendors, versions and configurations.

While simple cash flow models can be achieved with these technologies, for those interested in more advanced value-add forecasting requiring a higher degree of simulation capability often lacking from the standard TMS/ERP functionality, a more obvious place to look would be a business intelligence tool. Using a pre-defined template, implementation can be quick. Getting item cost forecast data or production level data from source systems (ERP, sales, purchasing, stock, etc) into the BI tool is a simpler way to get granularity and accuracy. By automatically integrating source system data, and tracking the development of a cash flow, more sophisticated “what-if” scenarios on liquidity and FX exposures can be extracted.

Business intelligence is the most capable area of the market for cash flow forecasting as it is possible to exactly tailor the forecasting solution to the individual process and the needs of the company. Simple templates can be used that look like a grid, but you can also set up interfaces to accounts payable and receivable (AP/AR), purchase orders, etc, and integrate into them into the forecast, or set up more complicated, long term horizon approaches on the whole value chain of company where cash flows can be derived by patterns or rules. Such an approach can also integrate short and long term forecasting in one solution.

There is currently no standard solution to reconcile the direct and the indirect methods. We see large variances in how companies do this, which makes it difficult with an off-the-shelf solution. The only way to do this is to build proper functionality in the BI tool, or to set up a completely integrated enterprise forecasting aligning the direct and indirect forecast approaches.

An accurate forecast requires bringing together data from different internal and external sources, which are usually in different formats and have different levels of consistency. Data analytics and BI solutions bring all the data together, using it for variance and trend analysis or slicing and dicing of information, according to the needs of the user. Such data analytics and business intelligence solutions integrate historical AP and AR data from internal ERP systems, banking system data, market interest and exchange rates, purchasing and sales statistics, to build an accurate, robust, comprehensive and timely forecast.


Cash flow forecasting is more about doing it right rather than having it correct. Macroeconomic circumstances are highly volatile and unpredictable, making the need for a reliable forecast more important than ever. By implementing integrated BI solutions, the treasurer can produce timely easy to use, customised reports for the business. Data collection, quality, reliability and reconciliation can be improved, enabling quicker decision making, realising company-wide benefits across the whole value chain.


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