Relieving the Pain of Cash Flow Forecasting

Cash flow forecasting is a major issue for many corporates – and today chief executive officers (CEOs) and chief financial officers (CFOs) are relying on treasury to provide accurate and timely information. Before 2008, cash forecasting was not as big a concern; but in terms of uncertainty and difficulty to get credit or cash from the banks since then, corporates began to look at their internal funding and realised the need for visibility.

Prior to the European Treasurers Council (ETC) in Brussels on 5 December, gtnews surveyed the attendees regarding how they manage the cash flow forecasting process. The answers varied from “we don’t have a system for that” to “we have some spreadsheets, some post-it notes and bits of paper”, right up to some companies that have gone through a transformation and developed cash flow forecasting best practice and technology.

In Brussels, the ETC discussion began by asking why cash flow forecasting was such a problem for corporate treasurers today. Some said that the problem lay in the fact that it is a process that is difficult to automate and relies on information gathered from other departments, such as sales and marketing, which may not understand the importance of forecasting. Comparing annual accounts from one company to another, there are many different models for cash flow statements, which are evidence that cash flow statements are very specific to specific business models. It is important to understand where the data comes from, who owns the data and who should be responsible for providing the quality data.

Another problem identified is that everyone has their own definition as to what is meant by the term cash flow forecasting – and what the information will be used for, whether they are a treasurer, banker or CFO. Aligning SAP enterprise resource planning (ERP) versions was another key issue, particularly when working within a highly acquisitive company.

An interesting point of divergence among ETC participants was around the timescale of the forecast: one reported that they had a one-year rolling forecast, done on a quarterly basis, while another treasurer said that they had very good cash flow forecasts for two days in the future. Although many find short-term cash forecasting relatively easier, forecasting a half year out or producing
12-month rolling forecasts seem much more difficult. More than one participant pointed out how important communication between business units and subsidiaries was for accurate forecasting.

Visibility of Cash

Cash visibility comes down to two things. First there is a need for visibility today: how much cash does the corporate have on its accounts? Most corporates have invested money in projects to get day-to-day visibility over their cash in a more automated way.

After corporates attain visibility on the day-to-day cash position, the second aspect is: what will be the company’s cash position in one week, two weeks, three months and at year-end? This is a much more difficult question.

It also depends who is doing the forecast. In treasury, there is more emphasis on short-term cash-based forecasts, whereas a controlling department will be looking more at strategic and long-term forecasting. Therefore, treasury will look at the short-term benefits, i.e. what is the cash position, what can be done with the company’s liquidity, how to best manage the cash position and liquidity in the group, etc. On the other hand, controlling or planning/analysis will tackle the three-year strategic plans within a company. Both recognise the benefits of having cash forecasting, but there are different agendas.

Is the Technology Available?

Cash flow forecasting is heavily reliant on Excel spreadsheets which can be combined with specialised forecasting systems. However, is there one single specialised forecasting system that answers all a corporate’s forecasting needs?

One ETC participant said ‘yes’ and explained that they were rolling out the SAP forecasting system. This covers sales forecasts and includes what is needed to obtain true financials, including a total liquidity forecast for a 24-month horizon. Although it was a difficult exercise, it now works well and gives not only the liquidity position but also a full currency risk picture. However, the forecast is not for the day-to-day but for the medium term.

Another participant added that the one drawback of SAP is that does not allow treasury to see historical data. Historical data is important, as past trends are needed to build cash forecasting. However, she had spoken with some SAP developers at a recent conference who said that they were working on a solution for this problem and hoped to have something in the next year or so. The short-term workaround was to download the information into Excel.

Tips for Success

The fundamentals for improving cash flow forecasting are manifold. It is important not to look for a system to solve cash forecasting problems in the first instance. Although a system is needed to automate and industrialise the production of cash flow forecasting, the starting place is really with the organisation and process.

Organisation is about governance, for example who owns the data and who is responsible for the data quality, and a culture that will build a bonus scheme to incentivise people to work with treasury. Improve the process by looking at cash flow statements specific to your business model, and understand where the information comes from.

One treasurer from a net borrowing corporate related her experience of using a “very low-tech” approach to develop a cash flow forecasting programme. She said that the company did not go for a technology solution but focused more on improving the process. Every year, the company has an annual finance conference where the finance directors get together. One year the CFO announced that the conference would focus on cash flow forecasting and there would be a few days of workshops with the aim of developing a more unified and consistent process.

The treasurer worked with the entity that was the best at producing the cash flow forecast. Together they did an enquiry before the conference began into how cash flow forecasting is currentlydone, how difficult is it, whether there are enough resources allocated, etc. During the workshops the participants covered cash flow forecasting theory. The treasurer did not want to have to consolidate 60 cash flow forecasts on an Excel spreadsheet and then compare it to actuals. The entities already did cash flow forecasting for their own needs and the treasurer didn’t want to get involved in that level of detail because their interest lies in the cash inflows and outflows.

The answer was to take some of the tools used in-country and build a back end, which produces a file for the treasury management system (TMS). So, the entities carry on doing all their cash flow forecasting in detail that they need to do in-country but they send the treasurer the FTP file that is uploaded into the TMS. The importance of the workshops was to have buy-in from the all the departments and entities – and having the CFO standing behind treasury meant that resistance to change was much lower.

Treasurers’ Pain Points

The ETC closed with a discussion on pain points facing corporate treasurers today and potential topics for future ETC meetings.

The top pain point across the board was counterparty risk, reflecting the volatile situation in Europe, Middle East and Africa (EMEA) with regards to the euro and sovereign issues. The big questions raised were how to manage the risk posed by the current uncertainty and also, if you are working for a cash-rich corporate, where to invest to ensure that it is as risk-free as possible.

The euro crisis throws up many questions, specifically around the single euro payments area (SEPA) project, legal agreements and also FX exposures.

Another going concern was about the raft of new banking regulations coming down the pipeline, such as Basel III, and their knock-on effects on borrowing. Will it impact on corporates because the banks are more restricted in how much they
can lend?

However, cash-rich corporates are facing the opposite problem. One treasurer related their recent experience with a global money market fund (MMF), which closed the possibility for the company to invest extra cash. The MMF could not invest in the market because government bonds were considered too risky. Coined by the meeting as an “investment crunch”, it is clear that as the situation gets more restrictive, MMFs have little opportunity to invest where it satisfies their investment criteria. They are all more risk-averse, which is a good development until they are so risk-averse that corporates can’t invest anymore.

One participant suggested that a future ETC should look at working capital, following on from a discussion they had had at lunch. Bank payment obligation (BPO), still in pilot phase, was also raised as an area of interest. The BPO attempts to automate the letters of credit (L/Cs)/bank guarantees mechanism, which is heavily paper-based and has discouraged many corporates in the past.

European Treasurers Council

The European Treasurers Council (ETC), established by gtnews and sponsored by Deutsche Bank, provides a forum for high-level treasury professionals to meet face-to-face to discuss issues and solutions.

In 2011 the ETC convened in London, Frankfurt, Geneva and Brussels. This year there are six meetings, including Munich, Vienna and Dubai. The locations of the ETC meetings are chosen for the wealth of high-level treasury professionals located in these centres, thought-leaders who are orchestrating the treasury world’s cutting edge implementations.

The next meeting of the ETC will be in London on 30 April. For information on the agenda, and to apply to join the meeting, email


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