Cash Forecasting: How it is Done

If you have visited a chat board on the internet, you have probably noticed how people compare notes on just about anything and everything. Even though many of life’s choices are purely a matter of taste, we tend to rely on the opinion of those who allegedly have more experience and can steer us away from beginners’ mistakes. I believe that corporates would also benefit from such open sharing of experience when it comes to applying processes and tools into practice. Even though processes cannot be identically copied between businesses, reviewing the notes of your peers helps you to set your expectations on a realistic level and to reach your objective without unnecessary pain and cost.

Cash Forecasting as a Pet Project

Cash forecasting has for quite some time been one of the favourite initiatives of treasurers who want continuous visibility and efficient tools for liquidity management. Functioning cash forecasting not only facilitates the short-term optimisation of bank balances, but it also provides an early view to mid- to long-term projections to the liquidity landscape. This allows the corporate to plan ahead and hedge their foreign exchange (FX) exposures more reliably. Furthermore, developing the process with support of specialised tools helps increase the quality and timeliness of the data used for such planning, and reduces operational risk.

In my role I have met more than 100 corporate treasury teams, mostly Nordic, that have been given the task to improve their organisation’s cash forecasting process and tools. Often those meetings have been the very first step in understanding how tools other than manual spreadsheets can support this task and what kinds of core and add-on benefits can be expected of the cash forecasting project.

Now I will briefly discuss some best practices through examples of two typical companies.

Best Practices in Type ‘M’: A Growth Business

Type ‘M’ companies exhibited these characteristics:

  • Production facilities often in exotic locations and currencies, several foreign sales offices.
  • No centralised reporting systems in place, head office consolidates manually collected data.
  • Most bank accounts are outside pooling structures.
  • Treasury is hesitant to place reporting pressure on business entities and does most of the liquidity planning work for them.
  • Treasury focuses on securing funding to production and collects risk to group level.
  • Optimising working capital and liquidity on short to medium term is vital but manual and inefficient.
  • Reason to start cash forecasting project: to minimise the need of short term external funding.

In a fast-growing organisation, it is not uncommon that the workload builds up faster than the available resources grow, and that is when the old manual processes start to fail. The essential treasury personnel have more pressing things to do than manually adding up pieces of scattered information, which may not be reliable anyway. Correcting the situation requires fast action to mitigate operational risk and there is little time to entertain dreams of a crystal ball. This leads to good focus and realistic expectations on the project.

The best outcome from a cash forecasting project for ‘M’ corporate takes advantage of the flexibility of the organisation and draws strength from the fact that cash is a vital asset, which is recognised throughout the group.

It also possess other strengths:

  • The group treasury is extremely well connected to the local businesses and is able to place itself into the shoes of the business unit representative.
  • The group treasury has detailed knowledge of the failure points of the current, cash forecasting method. The treasury knows what causes the biggest uncertainties in the company’s liquidity flows.
  • The corporation is small enough to make swift decisions and is not afraid to change the way of doing things – as long as it is convinced it will help improve its liquidity.

The successful ‘M’ corporate cash forecasting initiatives share these common items:

How to involve subsidiaries without overloading them

First of all, treasury has to accept that it can no longer let the business units enjoy the motherly service of the treasury department. It cannot feel bad about asking the units to accept responsibility of maintaining their own reports and participating in a group-wide process. The resistance for change is lowered by communicating, presenting concrete benefit calculations, and by ensuring that the tool selection will take the business units’ situation into account. Doubts are also alleviated by giving a clear step-by-step description of how the new process will be launched and followed.

How to identify and collect the essential data for cash forecasting

Which cash flows are crucial, most volatile and affect our funding situation the most? The information related to these cash flows shall be made available as real time as possible, from the best sources.

What they are depends heavily on the industry and business environment. For example, they can be customer payments that are triggered by an overseas delivery, customs clearance or other third party activities which are practically impossible to affect and to predict. Perhaps the group’s cash outflow changes with immediate effect as a result of a sales transaction – like for example at a car dealership. In such cases, it is of core importance to engage sales and delivery parts of the organisation in the forecasting process, as they have the best ability to forecast based on historical experience.

How to ensure value to subsidiaries

To make sure that the new process actually will be followed, it must add value to all contributors. The successful ‘M’ corporate treasurer is sensitive to the viewpoint of the business unit and selects a tool which is not only easy to use and replaces any previous tools, but also gives the business unit valuable service, such as feedback. If the cash forecasting tool automatically performs the comparison of forecasts versus actual cash flows and supports the goal of improving the forecast quality, it will bring clear additional benefits compared to a basic spreadsheet.

Best Practices in Type ‘XL’: A Cash Rich Multinational

The ‘XL’ corporate has the following traits:

  • Centralised enterprise resource planning (ERP) in place for main locations, several ‘stand-alone’ locations.
  • Cash pools are common.
  • Treasury views liquidity only on group level.
  • Treasury focuses on managing foreign exchange (FX) exposures but liquidity has been seen as a non-critical asset as long as its cost is reasonable.
  • Reasons to start cash forecasting project: optimise working capital, reduce funding costs and/or provide more accurate information for FX hedging.

From the point of view of improving cash forecasting, the ‘XL’ corporate has the following significant advantages:

  • The business units have some local treasury-related responsibilities, which has given them a fairly high level of treasury related knowledge.
  • The treasury has experience of launching new processes across the organisation.
  • The complexity of the organisation has already forced a high level of automation and process-oriented work methods in order to adhere to top level reporting requirement.

I find that ‘XL’ organisations have a very clear view of what they intend to achieve and how. Ironically though, the above list of advantages could also have a negative effect on the cash forecasting project. In large organisations, focus can be drawn to perfecting the process and creating a fully automated, integrated IT environment, whereas cash forecasting can indeed give excellent results even without all that. If the project team is too set on the ‘large corporate way’, a simple task can explode into a mission impossible.

Here are their essential issues to solve:

How to limit the scope

The best approach to cash forecasting in ‘XL’ corporates begins with taking a step back and getting a clear view of what is the primary objective of the project. For example ‘to improve the timeliness and reliability of the forecast’. Often it is the FX hedging requirement which drives the project: ‘to improve visibility into the future FX flows that need to be hedged’. A primary objective can also be ‘to improve the reliability of cash forecasts within cash pools, in order to optimise the pool balance’. Whatever it is, it is crucial to stick to it. There will be dozens of secondary objectives, more or less related to the primary objective, but trying to cover all of them will sidetrack the project in no time with absolute certainty.

How to control the project

The second step is to decide on the frames and limits for the project itself; how much are we prepared to pay for reaching the primary objective? When do we want results? The answers to those questions are helpful in keeping the secondary objectives in control so that the scope stays within the intended limits when it is time to select the tool and launch the new way of working.

What to require from business units

Whereas one could say that the ‘M’ corporate works through the project from bottom to top, ‘’XL’ goes from top to bottom. The sources of data are too versatile for the treasury to master on a detailed level, and they rather need to formulate their primary objective into a concrete reporting requirement for the business units, instead of looking at the data itself like an ‘M’ corporate does. After they have decided what kind of contribution they need from the business units, they can start the tool selection process.

A Tip for Process Developers

I would like to finish off by sharing a brilliant innovation by one of our customers. They realised that even a great tool in itself does not add value unless the users are motivated and committed. They established a ‘user group’ which facilitates the exchange of feedback, ideas and peer-to-peer support between the business unit representatives involved in the forecasting task. By introducing a social and professional sense of belonging to a group with shared goal, they have created a cash forecasting community which motivates the process contributors to strive for continuous improvement. Perhaps the era of corporate chat boards isn’t that far away after all?


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