Foundation of Successful Cash Flow Forecasting
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Transcript of Foundation of Successful Cash Flow Forecasting
Foundation of Successful Cash Forecasting
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 2
Valerio TrinchiGlobal Treasury Advisory [email protected]
R.B. EricksonDirector of North American [email protected]
Today’s speakers
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 3
Fads
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stra·te·gic /strəˈtējik/adj. relating to the identification of long-term or overall aims and interests and the means of achieving them
“Treasury groups report that their function is more strategic than ever before, with an increased focus on scaling the treasury organization”
“The role of the corporate treasurer has fundamentally and irrevocably transformed […]to one that is significantly more visible and highly strategic.”
“There’s increasing emphasis on having the treasury function play more of a strategic role in the organization.”
“Treasurers are increasingly taking on a more strategic role within their organizations. Strategic thinking is becoming business-as-usual for corporate treasurers.”
Everyone wants to be strategic…
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 5
re·ac·tive /rēˈaktiv/adj. acting in response to a situation rather than creating or controlling it.
Can’t be strategic without looking longer term For liquidity management (cash, debt,
investments, hedging, etc.) forecasting is the means of achieving a longer term view
…and nobody wants to be reactive
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 6
Why is cash forecasting important?
Objective Critical for treasury? Critical for management?
Capital / long term investment Yes Yes
Company valuation / credit rating Yes Yes
Debt covenant compliance Yes Yes
FX exposure management Yes Yes
Management performance reporting Yes Yes
Shareholder dividend planning Yes
Short-term investment yield Yes
Short-term liquidity management Yes
Strategic investments planning Yes Yes
Subsidiary dividend repatriation Yes
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Limited accountability / understanding of objectives reduces forecast accuracy / validation Businesses aren’t well versed in the cash flow process and there is no clear understanding
of ownership / accountability Frequent disconnect between forecast process objectives and the performance metrics in
place to measure the success of the process– Lack of emphasis on cash flow results or variances to expected outcomes– Limited incentive to invest more time to maximize the quality of the forecast
Lack of clearly defined process between HQ, business units and shared services to validate cash flows
Cash flow forecasting challenges
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Cash flow forecasting challenges (cont.)Lack of standard, centralized processes and systems limits visibility into timing of cash flows Cash flow projections (especially for profit remittances,
intercompany and dividends) are inaccurate without standard / central process and systems to capture and report data
Low visibility of both sides of intercompany transactions and undefined validation routines (manual or automated)• Low intercompany counterparty projection consistency• Drives inaccurate forecasting
Inefficient use of team in developing the forecast Many contributors adding small amounts of information
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 9
Management / business unit reporting may be out of sync with cash pool management Management reporting structure may not support treasury’s cash flow view requirements
by cash pooling structures, legal entity, country, and/or currency Complexities in bank account structure and co-mingling of funds creates challenges in
segregating flows by legal entity and transaction type for management reporting purposes along business or product lines
Multiple data sources + Manual processes = Greater risk of mistakes Cash flow forecasting is not performed as part of a formally, structured, coordinated
activity, but rather on an ad hoc, as-needed basis Multiple sources of cash flow data leads to inconsistency Lack of communication between HQ, shared services and business units reduces visibility
into cash flow decisions Lack of standard processes means more time spent on data capture, not cash flow analysis
Cash flow forecasting challenges (cont.)
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No recognition / adaptation to the variability of forecast: Forecast data targets moved, formal schedule not adhered to Key emphasis on annual plan forecast, much less on updates / variance from planFocus of most forecasts is primarily on accuracy, e.g. variance reduction Focusing on forecast accuracy can’t be done on its own. Business volatility will
always impact the reliability of the forecast. The focus should be on factors such as:– Improve the process and related systems architecture– Develop aggressive variance analysis methodologies– Identify and monitor key business drivers and incorporate into an “early warning system”
If these steps are followed, forecast accuracy will improve by default
Cash flow forecasting challenges (cont.)
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 11
1. Work out what is required and why
2. Develop a strategy to achieve it
The fundamental approach for successful forecasting
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Understanding the effectiveness of cash flow forecasting involves evaluating four key process steps.
Early warning indicators
Cash flow forecasting process - overview
Know your business
Cash flow and forecasting needs
Organizational structure
Business objectives and cycles
Forecast methodology
Principal forecasting elements
Source for forecasting elements
Workflows to obtain data
Variance analysis
Actuals vs. forecast
Results vs. forecast objectives
Forecast uses
Forecast objectives and goals
Forecast audience
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Business objectives → cash flow and forecasting needs M&A IPO Manufacturing RetailBusiness cycles Strategic planning (1 / 3 / 5 year): FP&A indirect method Seasonal (annual, quarterly, monthly): direct method Immediate (monthly, weekly, daily) daily cash positioning: direct method Reconcile strategic-plan forecast with direct-method seasonal and immediate forecastsOrganizational structure – forecast participants Regions, entities, countries, currencies Centralized vs. decentralized
Know your business
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Linked to business objectives and needs Forecast uses– FP&A– Wall street reporting– Effective use of debt and investments– Etc…
Forecast audience– Executives and management– Business units, subsidiaries and regions– Treasury
Forecasting objectives and goals
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Sample cash flow forecasting goals:– An accurate estimate of the organization’s annual
cash flows and related long-term borrowing requirements or investment opportunities
– A reliable cash flow target that senior management can provide to financial markets
– Advanced warning signals of cash flow forecast shortfalls, which enables treasury to proactively implement corrective measures
– A tool to manage the on-going cash and financing activities of the company on a short-term basis
Forecasting objectives and goals (cont.)
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 16
Forecast methodologyPrincipal elements Data source Workflow
Collections
Client 1 Sales Delivered monthly via spreadsheet
Client 2 Sales Delivered monthly via spreadsheet
Other Clients Sales Delivered monthly via spreadsheet
Investment Income TMS Update from Investment module
Disbursements
Capital Expenditure AP Daily feed from ERPContractors AP Daily feed from ERP
M&A FP&A Updates via email, as needed
Payroll TMS Historic trending model
Leases TMS Update from Debt module
Rent AP Monthly feed from ERP
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 17
“Measurement is the first step that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it.”
H. James Harrington
Variance Analysis
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Forecast vs. actual– How did we do?– Initial forecast accuracy affects treasury MBOs
and compensation Forecast vs. forecast– What changed and what can we do to get better
information earlier– What-if analysis
Forecast results vs. forecast objectives– Poll forecast stakeholders – did they get the
information the needed?– FP&A vs. treasury
Variance Analysis
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Forecast complete…Now what?
Scenario one: excess funds uncoveredInternal opportunities External opportunitiesInter-company investments Investment market (e.g. money
market funds, bonds)In-house banking / pooling
Supply chain financing – dynamic discounting
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Forecast complete…now what?
Scenario two: insufficient funds availableInternal measures External measuresInter-company loans Public debt (e.g. bonds,
commercial paper)In-house banking / pooling Private debt (e.g. credit facilities,
revolvers, term loans)Capital injection Supply chain financing – reverse
factoring
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Additional Resources
White Paper: Short Term Forecasting - Best Practices and Pitfalls to Avoid
Learn how your team can optimize cash management processes for all markets, while ensuring the smooth running of treasury operations and complying with local regulations.
Download the white paper at: http://kyri.ba/cash-forecasting-paper
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