Accurate cash forecasting is critical to Microsoft’s global liquidity management strategy. The corporate has more than 350 legal entities and 200 subsidiaries, however, across 118 countries so getting them all to report in to the centralised US-based treasury on a monthly basis is no easy task. At the start of 2012 a project was launched to improve the efficiency of this process, enhance the firm’s cash position assessments and reduce its risk. It came to fruition in Q2 2013 when a redesigned cash forecasting procedure, created by the treasury department in conjunction with the finance operations team, went live.
For years the overall variances from the 200 subsidiary companies averaged more than 30%. With more than US$1bn in the system daily, over forecasting by hundreds of millions of dollars, as was common, put Microsoft at heightened risk. The primary objective of the project therefore was to identify best and worst practices and then implement a standardised procedure for all the subsidiaries across 118 countries to follow.
The past five years have presented new obstacles for international treasury management as Microsoft and other large corporates have had to adapt to events such as the great recession of 2008 onwards, followed by the eurozone crisis and the upheavals of the Arab Spring – not to mention the capital and foreign exchange (FX) controls that have sometimes resulted from this instability. Each dollar held by the technology giant in subsidiary bank accounts around the world faced increased counterparty, sovereign, FX, fraud and other potential risks as a result.
Microsoft’s centralised treasury in the US is responsible for ensuring hundreds of legal entities around the world have just enough cash to support operations. With overall forecasting variances of more than 30%, over forecasting by hundreds of millions was putting the company’s finances at risk. Treasury realised that it needed to revamp the cash forecasting process in order to improve overall working capital and to deal with these new challenges.
The size of Microsoft’s international presence and subsidiary network presented a big challenge. Unlike many corporations that forecast by regional operating centres or via a few companies, the technology giant requires all its 200 subsidiaries to forecast all operating expenses monthly. In order to be successful it was imperative that partnerships were formed across the organisation. The project team held meetings with payroll, accounts payable (A/P), tax, supply chain, and financial controllers in dozens of countries to identify current best and worst practices at the firm. It was determined that cash forecasting errors were a result of several underlying problems.
The identified problems were:
- Subsidiaries were forecasting based on historical data instead of actual data.
- Varying procedures were in place at different subsidiaries for forecasting outstanding accounts payable, payroll, taxes, and other payables. There was no standardised procedure.
- Limited or no visibility was in place to see large directs debits (rent, tax, utilities, etc).
- Limited visibility to supply chain and hardware expenses.
- Limited or no engagement was in effect between cash forecast preparers and payroll, tax, and A/P and accounts receivable (A/R) teams.
How Was the Project Planned and Executed?
The treasury knew that in order for such a global cash forecasting project to be successful it was imperative to foster partnerships. The team therefore held kick-off meetings back in 2012 with senior managers to ensure that it received the necessary support from key stakeholders. A core project team was created between treasury and the finance operations teams to identify clear roles, deliverables, and timeframes.
Over the next six months the project team looked at monthly forecasts to actual reporting by subsidiary, to ascertain the best and worst practices across the corporation. The team held meetings with payroll, accounts payable, tax, supply chain, and financial controllers in dozens of countries to drill down and identify current procedures and obtain useful templates to follow when synthesising the new improved procedure. For each of the problem issues identified the team created a project plan to resolve them. Leveraging Microsoft technology, it kept a detailed project plan on a SharePoint site which was accessible to all and listed all the project owners, accountabilities, and completion dates.
Bi-monthly meetings were held with international teams to ensure that the objective of creating a standardised global cash forecasting procedure remained a priority, and that sub-objectives along the way were met. The finance operations team helped financial controllers in each subsidiary to establish a database and real-time engagement models with the payroll, accounts payable, and tax teams. Throughout the more than year-long project, two databases were created leveraging resources from internal IT teams. A clear owner at each of the 200 subsidiaries was identified to record all direct debits. Additionally, a second database was built to keep the key contact information for the payroll, tax, and accounts receivable teams. Now the individual preparing the cash forecast knows who to interface with each month to get actual, instead of historical data.
After identifying best practices in this manner, treasury then created a detailed standardised cash forecasting manual that each subsidiary now uses companywide. This manual is now held on a SharePoint system for quick and easy global access.
A new standardised cash forecasting process is now in place for all of Microsoft’s 200 subsidiaries across 118 countries. Since its introduction in Q2 2013 it has reduced worldwide cash balances by more than $250m and cut cash forecasting variances by 50-70% (to under 15% globally).
Other key accomplishments include:
- The development of a better engagement model between stakeholders, including payroll, tax, A/P, A/R and the supply chain.
- Treasury saves 30 hours monthly on repatriating over forecasted cash.
- Development of a new scorecard for measuring forecast performance. Minimum standards are now in place.
- A new database has been implemented for companywide direct debits and all cash forecasting contacts details, so actual data instead of historical data can now be used.
- There has been a large decline in FX purchases to cover ad hoc funding requests. As a result Microsoft has reduced its FAS52 volatility.
Additionally, there is now an expanded role for treasury within the corporation, improved compliance and control capabilities and significant risk reduction – not to mention the desired substantial improvement in the quality of cash forecasting and improved efficiency and productivity. The project has been a resounding success.