How to Improve Cash Flow Forecasts

Effective cash flow forecasting is a critical function to any business but is even more critical today due to the pressures imposed on access to cash in the current economic climate. As can be seen from a number of surveys, cash flow forecasting along with liquidity management comprise the top two focus areas for improvement within corporations.

While there are several models that can be used to predict future cash flow, there remain three specific challenges:

  1. Availability of data.
  2. Resources to manage and monitor the task.
  3. The availability of adequate tools.

It has also been widely reported that a large proportion of corporate treasurers still rely on spreadsheets but while many plan to change this practice, these challenges still need to be addressed at some firms. In this respect there is a need for an innovative approach – ‘the art of the possible’ in cash flow forecasting.

Availability of Data

For an effective approach to cash flow forecasting, whatever the tool used, there has to be access to a wide range of accurate data. Historical data can be used as a baseline for forecasting in areas such as salaries, energy bills, or direct debit collections. But sales data and production costs and materials can be more volatile and would benefit from more immediate or ‘near-time’ indicators based on the broader needs of the core business and to fine tune the process.

Cash flow forecasting needs to be embedded in the sales/sales administration process with an accelerated implementation of electronic invoicing (e-invoicing), and the right payment instruments adopted to enable information to be readily available as regards cash movements (credit transfer versus cheques). Use of advice to receive (ATR) or other advising can also be useful mechanisms for early notifications of cash inflows.

However, the sheer diversity and volume of cash flow related data and its availability in a consolidated or aggregated form across a major corporation represents a major challenge, given the many uses for cash whether that be an outbound payment or an inbound collection or foreign exchange (FX) and money market settlements.

Furthermore that data is not simply within the domain of the corporation or sufficiently visible to the corporate treasurer as banks also have a major role to play. Consider calls on cash that are within the banking or financial services domain such as interest charges, fees, or the maturity of a debt obligation, such as a bond or the final leg in an FX swap. The latter can represent significant inflows or outflows.

The world of payments is also becoming more instant in execution given the European Payment (EP) services directive of D+1 value and initiatives such as immediate payments by MAS in Singapore. With large corporations comprising multiple international subsidiaries across many different time zones, handling multiple currencies, who in turn have multiple banking relationships, the situation becomes even more complex.

Consolidating Data

One step that a number of large corporations have undertaken is to centralise the treasury function and adopt a payments factory concept, whereby all payments and collections pass through a common system to and from one or more enterprise resource planning (ERP) systems. Where such systems are on differing platforms there is always the likely challenge of differing formats whether that be for a payment instruction, an advice or cash management reporting from banks(s). One advantage is that the treasurer can remove uncertainty in outgoing payments by steering outflows directly.

When ERP systems are connected to this treasury ‘hub’ more immediate indicators can be used to provide a near-time view of cash inflows and outflows. Whereas building a business model and predicting cash flow based on sales forecasts, production plans, bill of materials, etc provides a start, there is a more ‘active’ approach that can be adopted. This depends on effective consolidation of data into usable ‘buckets’ through integrated systems and effective inter-departmental communication (and buy-in).

Cash outflows could start with the date when a purchase order is raised, to which can be added the lead time for shipment based on historical data and supplier payment terms, to when an invoice is approved for payment on which the payment terms can be added to provide the likely date when a payment should be made.

Similarly a purchase order received, or an invoice raised can also provide near-time indicators for when a remittance will be received. A continuous improvement philosophy should also enable actual statistics to be obtained for specific suppliers or customers in terms of accounts payable (A/P) and receivable (A/R) performance respectively.

Access to Bank Information

Banks are clearly partners in this process and to ensure improvement both parties need to cooperate to put together a solution. With SWIFT providing standards and messaging services through the SCORE service, a corporation is able to gain timely information from its banks in the form of balance and transaction reporting, cash management services and for uploading mixed payment files. However, while ‘actual balance’ data is made available through corporate internet banking or ‘host-to-host’ channels, customised reports are not always available on demand.

In terms of fees, banks need to make available pro-forma statements of pending bills in the same way regular bank account balance data is provided, but many banks are still in the process of implementing a centralised or common billing system. If predictive interest charges or income can also be included on corporate accounts in the same way that it is done with credit card balances then this would be a valuable addition to the bank’s offering.

There is also the challenge of most bank systems not being internally integrated leading to inability to provide current or cash flow sensitive information to a client across all their product divisions, through a ‘single window’ – portal or channel.

With the growth of business to the far eastern markets such as China, trade finance services are very relevant despite the trend of increased open account usage. The importer or exporter’s banks will have the data needed to determine when a payment will be made or received, how much and in what form, based on agreed credit terms, but there will of course be diverse message formats to contend with. However, service providers such as Bolero provide the data as a single view for planning purposes in a common format.

While banks and their associated services organisations can provide the required information to corporate customers to merge with other data that they hold, there is still the question of who should provide the cash flow forecasting tools and information that is needed by the corporate treasurer, and whether this can be provided in a cost effective manner.

Cash flow Forecasting as a Service

Many corporations make use of a ‘hub’ bank, principally for payables as the relationship for receivables is dictated by a bank’s access to local clearing systems. This is likely to change in euro-based countries after the single euro payments area (SEPA) end date and may one day change in a similar manner should the single Gulf currency take off, but for the rest of the world local bank relationships are likely to remain.

Hub banks also take the role of a consolidator of balance and transaction reporting statements but could go one step further into what could be provided in terms of a cash flow forecasting service. Such a service could offer a high level cash flow dashboard, enabling drill down to granular details and could also offer a modelling capability for ‘what-if’ scenarios. This would be a valuable add-on to current cash and liquidity management services.

The advantage is that a bank can provide a service for multiple clients and apportion costs over a wide range of clients. It can also offer new or differentiated products. Furthermore, the bank would be in pole position to use that data to predict cash flow shortfalls and be able to offer extended credit or products to meet that need ahead of when it is needed, especially as cash flow forecasts are one of the inputs into the decision-making process for loans.

As many banks are now implementing a global payments hub or utility, clients may be more likely to use a hub bank for receivables as well as payables and with the examples of the SEPA and multi-currency clearing in Hong Kong, corporations can also simplify the number of bank relationships.

If the bank is to offer ‘near-time’ forecasting then corporate data needs to be made available to the bank systems. However, assuming that the corporate client can provide invoice and purchase order data this needs to be ‘pre-consolidated’ into meaningful aggregated data by day/date and standards set for common message formats as found in ISO 20022 message sets. Usage of the standards being adopted in Europe could be equally used in southeast Asia. While aggregation could be done by the bank, there may well be communications bandwidth issues in uploading large volumes of data and this would need to be subject to feasibility tests.

A private or secure cloud concept is also worthy of consideration to hold this data in perhaps an escrow-like structure, which could also enable other corporate commercial or banking partners to access such data under the control of the corporation. The bank will, however need to be able to manage any non-financial data, which should not be an issue for banks used to managing trade service documentation, particularly in light of the new Fedwire requirements that banks should be able to accept remittance data along with its payment. Should this pre-aggregation not be feasible, SWIFT’s SCORE corporate connectivity could provide the conduit to collect data from individual subsidiaries.

For a hub bank to offer this capability there also remains a value add to both the corporate client and the bank itself. Armed with the data on invoices approved for payment, and information on past and projected cash flow, the bank could also enable the buyer organisation to extend its payment terms to 60/90 days or beyond, with some means of mitigating the pressure on the seller through offering the seller the capability to be paid against an approved invoice under a factoring type agreement when that organisation needs the cash. Similarly armed with statistics on payment performance and with the invoice data available a bank would be able to more rapidly act on requests to securitise receivables (and avoid what one global corporate treasurer suggested – an online auction site for receivables securitisation).

However, another issue remains and that is that of inter-bank connectivity to provide a view of data across all relationship banks. In the case of balance and transaction reporting, mechanisms and standards exist to enable banks to consolidate statement information, but in the case of investments and fees the mechanisms are less clear. Under modern fee billing systems, a pro-forma or interim bill could be created and treated as another form of statement but the potentially large infrequent items on the maturity ladder would be another matter, in which case the corporate treasurer may need to input these and other predicted high impact transactional events. This then leads to the need for greater self-service being available from a bank.


Given the above there is an opportunity for banks and their corporate clients whereby the bank or other service provider can offer added value services in terms of cash flow forecasting. Starting with a predictive model that can be refined in light of actual performance, extending to a near-time-based service which would generally be around standard payment terms, augmented by data provision from the investment and FX and money market side of the bank a step-by-step approach can be structured.

With all the talk of cloud computing and software-as-a-service (SaaS) coupled with the availability of technology in terms of massive data warehouses and data mining tools this can be a reality. Banks and their corporate clients will need to agree a high level model for aggregating data and define the roadmap jointly to introduce a cash flow monitor and associated services based on current gaps and immediate needs of the corporate treasurer.


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