Commitment and Support is Key for Cash Management

I have written before about the importance of cash forecasting. Its significance has increased since the financial crisis and the move to understanding both where the internal cash is and how much of it is available to corporate treasury is crucial. A recent Reval/gtnews webinar on the topic indicated that the main driver to improve cash forecasting was to enable treasury to make more informed decisions but the majority of attendees indicated that it takes a day, or several, to get accurate cash forecasts within their company.

What has interested me when talking with treasurers on this topic is that there is usually either an absolute interest in the topic or none at all. The reason for this I believe is that cash forecasting is one area that you either do well or not do at all.  The consequences of getting forecasting wrong are real. You may end up with a position that is too long or too short, and either of these outcomes may have negative financial impact on the treasury.

Dealing With Uncertainty

Uncertainty in cash flows has always been a top reason for difficulty in forecasting for many corporates. If you think about the numerous elements that might go into making a forecast such as accounts payables (A/P), account receivables (A/R), payroll, acquisitions, tax, legal, and so forth, then the size of the problem becomes evident.

There is a dependency on others in the organisation (typically operating companies or subsidiaries) to provide regular and accurate data on future cash flows in these areas. Often this is to a group (treasury) to whom there is no direct reporting line and no real understanding of the importance of such data to the group.

Education is therefore important but more necessary might be to have senior management buy-in and support for the cash forecasting function. I talked to one treasurer recently who said that he achieves near 100% accuracy for forecasting because the people responsible for providing the information have their bonuses directly linked to the quality of the information provided.

Understanding the importance of forecasting to the company as a whole and rewarding the contribution made by the subsidiaries is vital. It is easy to get hung up about achieving 100% accuracy but companies understand that in the early stages this may not be possible and so achieving a realistic accuracy rate of, say, 80% might be enough and then to work from there.

Common Problems and Using Tech and Training to Overcome Them

A common complaint that subsidiaries make is that it takes too long to provide the required cash forecast and there are no tools given for the job, in terms of relevant technology or training. Excel or other spreadsheet packages are typically used but if there are no standard company forecasting templates or means of transmitting the data then it makes the job difficult or impossible. People need to be shown how to use the template, and to all use the same one.

Until recently there have been few specialist cash forecasting systems. Some banks provide systems and many treasury management systems (TMS) have modules relevant included, but not all of these are standalone. A new entrant to this space is Cash Analytics. I recently attended a presentation of this cloud-based platform. Cash forecasting by its nature well suited to a cloud computing environment and being able to quickly input forecasts, via Cash Analytics or numerous other vendor systems, and then consolidate them at the touch of a button is a powerful tool.

Getting the information is only one step but where such systems really come into their own is being able to compare submissions and then perform ‘actual’ versus ‘forecast’ analysis. Once this is done then treasury truly has a means of monitoring the performance of individual subsidiary submissions over time, and to put right any inaccurate forecasting.

So having the buy-in and support to run a cash forecasting programme, and then the right tools in place, can result in greater visibility of cash within treasuries. It is the end game that all corporations want and it is within reach.


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