Before implementing a cash management strategy, treasury needs to know where the cash is. While this sounds obvious, cash flow forecasting has for years been a top priority for treasurers. Techniques have changed over time, with technology providing treasurers the means to gain greater visibility over cash flows. Nevertheless, challenges remain.
Coming out of the 2008 financial crisis, the UK’s Premier Foods was under serious financial pressure. The company, whose products include Ambrosia desserts and Mr Kipling cakes, disposed of some that weren’t key ‘power brands’ and refinanced a total of four times. It then embarked upon a variety of securitisation programmes, worth up to £120m (US$183m/€162m), explained Margaret Bingham, Premier’s cash forecasting manager, during day one of the Association of Corporate Treasurers’ (ACT) cash management conference 2015 in London.
Against this backdrop, cash flow forecasting became more important than ever. Bingham referred to the discipline as being central to the company’s cash management system and key to good decision-making. Having greater visibility over cash flow and being able to easily discover natural hedges are naturally both great advantages to the treasurer. The problem that Bingham and her team faced was that Premier was made up of seven different divisions that were essentially operating as independent companies. These divisions had a very parochial view over what they saw as “their cash” – to the detriment of treasury.
In order to tackle the multitude of divisions, systems in use and approaches to cash management, the treasury team at Premier Foods implemented a shared service centre (SSC). Over an 18-month period, all financial planning from the seven divisions was lifted and dropped into a single SSC based in Manchester, allowing treasury to take control of the balance sheets from the divisions.
Bingham described that, with the SSC in place, treasury at Premier Foods now has a daily 13-week forecast, which can go out to 26 weeks if required. The ability to produce a daily 13-week forecast is very important. As Bente Salt, group treasurer of deepwater construction contractor Ceona Offshore described in a later session: when it comes to funding or other conversations with banks, they will be looking for quarterly payments that may not show up in a 12-week or shorter forecast.
In addition to the improved forecasting capabilities of the group, Bingham described how Premier’s treasury now participates in weekly accounts payable (AP) and accounts receivable (AR) update meetings. Here, they are kept up to speed with these departments about what realistically will happen over the coming week, and have the opportunity to work through any points of concern. Treasury also has weekly meetings with senior management.
With the SSC in place and cash flow forecasting enhanced, Bingham described how the treasury department has three key levers that it can use to enhance its cash management. The first, on which Bingham was particularly effusive, is vendor financing. She explained how this could benefit relationships with vendors, as the cost of funds that treasury can offer is lower than their traditional financing. Securitisation is the second lever, with the Premier Foods securitisation programme, which is now up to £120m, being based on the company’s AR ledger. The third lever that treasury also now wields is use of the money markets and overdrafts.
A great benefit to establishing an SSC is the ability it gives treasury to streamline bank accounts, ensuring that it is only paying for what it needs. Bingham shared the fact that, since Premier Foods established its SSC, the number of divisional bank accounts has been reduced by 76%. In turn, this has reduced the senior management’s day-to-day involvement in the banking side of things, freeing up time for them to focus on corporate strategy.
For a further report on the ACT cash management conference, click here
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