Gaining End-to-end Cash Flow Visibility

Using prior/current day balance and transaction reporting is the first step to building a running cash flow balance. Additional cash flow components would include:

  • Cash flows generated from financial transactions (e.g. foreign exchange (FX), debt and investment).
  • Possible mergers and acquisitions (M&A) or divestures.
  • Treasury-related transfers (e.g. tax and cash pooling).
  • Human resource transfers (e.g. tax and payroll).
  • Bank fees.
  • Financial institution debt and credit line issuance costs and fees.
  • Accounts payable (A/P) accounts receivable (A/R) and forecast sales.
  • Summary cash flows generated from quantitative modelling.

The challenges facing a treasury wanting to centralise corporate-wide forecasting may vary from data gathering and language barriers to accountability and disciplined workflows. Some industries, such as defence contractors, typically have well-defined long-term engagements that allow for relatively accurate cash flow forecasts for the duration of a particular contract. Manufacturing or retail industries, for instance, may have rapidly changing short-term forecasts as customers’ taste for new products and services suddenly shifts. Each industry and corporation within that industry will have its own unique challenges.

As soon as a treasury department begins to map all of the data points which go into building an accurate cash flow forecast, it quickly becomes apparent that automation and straight-through processing (STP) will be the engines driving timely and accurate forecasting. One of the first requirements to increase automation in forecasting is to report on all of the relevant data points. This can be done in one of two ways: using a system that initiates all required forecast information or a hybrid solution. A hybrid solution acts as both the initial point of entry for certain forecasts and a collection mechanism for data points (via STP) from other systems or employees. The software used for this purpose should have the ability to map to other system formats or employee spreadsheets without the need for development resources. Ideally, the end-user should be able to map and make changes to the formats being uploaded.

Disparate systems across diverse geographic locations can also create challenges to integrating data in an overlay forecast tool. In some cases, older systems may not have the ability to generate a data export or automatically send information using an accepted file communication protocol. In either case, it might be necessary to have an affiliate office upload forecasts into the cash management system. Ideally, this tool will be multilingual to allow users to upload forecasts or key in any forecasts in their native language. In addition, the system should have the ability to standardise any country-specific information into something meaningful for a centralised treasury. For instance, local transaction types could be grouped into more general cash flow buckets used across the organisation. In this way, the local affiliate would retain its detail while treasury would benefit from standardisation at a higher grouping level.

A forecast is only as good as the data used to build it. Forecast reconciliations can be performed on a summary or a detailed level. Urgent transfers, such as payroll, tax, pool balancing, FX settlements and debt repayments, are often reconciled individually at the corporate level, but less critical cash flows could be reconciled as summary forecasts presented at the affiliate level. Aggregate forecasts coming from sales, A/R, A/P and quant-generated methods will typically be disbursed across a time bucket consistent within the level of predictability.

The periodicity of these aggregate forecasts will not necessarily be tracked in the same timescale. A/R might be tracked weekly, while it might make sense to track A/P monthly. Both detail and summary forecasts need to be tracked and reported on for accuracy. A detailed forecast variance or summary snapshot variance should give enough information to quickly identify the source of the error. Transaction variances are often simpler to explain, while summary variance could require a follow-up with the owners of the data and system for further clarification and future modification. A forecasting system that creates a disciplined workflow through individual accountability will improve forecast accuracy and enable more accurate liquidity planning.

Liquidity Planning

Efficient balance reporting and accurate forecasting are the building blocks of a treasury department’s ability to dedicate more time and effort to liquidity planning. Much like a cash position worksheet stretching into the future, a liquidity position worksheet should, at a glance, highlight any liquidity concerns. Investment rollovers, debt maturities, which may require reissuance, overdraft facility limits and expiring credit lines are all critical pieces of the liquidity puzzle. When the liquidity roadmap is laid out, treasury can begin planning for possible corporate initiatives.

Focusing treasury on supporting strategic initiatives for increasing shareholder value had been discussed long before the global financial crisis. However, before helping to increase shareholder value, treasury needs the tools required to help preserve existing shareholder value. Issues surrounding the viability of commercial paper issuance and credit line renewals are not always analysed at the level of complexity that is sometimes required. Even after the crisis, many treasury departments still do not have the tools to help identify all of the variables affecting corporate liquidity. For example, running a simulation for a failed credit line renewal, followed by an interest rate shock to existing facilities to analyse the impact on future obligations, is out of scope for many treasury departments.

This is exactly the type of analysis needed to transform treasury into a strategic partner alongside corporate endeavours. Spotting hazardous or even worst-case liquidity situations and creating a list of possible options can be useful in potentially preserving shareholder value. Alternatively, value can be increased by identifying forecast cash accumulation horizons for expansion of projects, acquisitions or increasing the cash cushion.

The complexity of problems faced by treasury requires at least some automation. A deeper extension of automation and analytical tools allow corporates to gain end-to-end visibility. In turn, this visibility transforms into shareholder value.

Creating a Business Case for Automating End-to-end Visibility

In building a case for increasing automation, corporates should look at hard and soft benefits and perform a cost/benefit analysis. A typical starting point would be looking at manual processes, such as balance reporting, distribution of bank statements and cash pool balancing, to determine current time commitments. In addition, the costs of using current financial institutions and bank portals, as well as reporting charges for distribution to multiple locations, should also be considered.

Time savings, fee reduction and unearthing trapped or hidden cash include some basic hard savings. Soft benefits of increased automation typically include: business continuity, efficient audits and reduction of errors. Lastly, a cost/benefit analysis should identify the problems to be solved, the current costs and the scope of benefits, including reallocation of resources. These should be weighed against the one-time implementation and ongoing costs of automation to determine the net benefit to the corporate.


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