Perfecting the Cash Forecast: How to Add Business Value to Your Organization
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Transcript of Perfecting the Cash Forecast: How to Add Business Value to Your Organization
Greg Person, Vice President, Pre-Sales
Bob Stark, Vice President, Strategy
September 29, 2015
Perfecting the Cash Forecast: How to Add Business Value to Your Organization
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL.
Why Forecast?
Key questions to answer when forecasting
Path to success: Improving your forecast
Questions & Answers
Areas of discussion
Why Forecast?
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Value of forecasting = making better decisions with cash
Investing idle pockets of cash
Invest for longer
Borrow more efficiently
Visibility into FX Exposures
Finance the value chain (supplier finance / customer finance)
Why Forecast?
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL.
Value of forecasting = avoiding scrutiny by shareholders
1) Shareholders want value from operating cash flow & cash balances• Shareholders can see your balance sheet and cash flow statement• Reinvest free cash flow against capital allocation strategy• “We’re cash rich” or “interest rate are low” no longer sufficient
2) Strength of USD• Hedging has never been talked about as much as right now
3) Value of overseas cash• Need to optimize use of foreign cash before tapping into ‘more valuable’
domestic balances
Why Forecast?
Key questions to optimize forecasting
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL.
Be efficient with your valuable resources
Cash flow forecasting involves significant input, time and effort from across the organization
Clearly determine the decisions the cash flow forecast information will facilitate and benefits this will bring to the company
1. What am I solving for?
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL.
Repeated mistakes lead to poor information and flawed business decisions
One certainty with any forecast is it will not be 100% accurate
Cash flow forecasting is an iterative process variance analysis and understanding the root causes responsible for forecast error is critical
2. Am I making the same forecasting mistakes?
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL.
Lack of insight to corporate strategy will increase probability of material variances
Corporate Treasury should not operate in corporate silo
New product lines, M&A strategies and expand internationally, it will greatly impact the future cash flow needs and performance of the organization
3. Do I understand my business?
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL.
Stop leaving money on the table and reduce interest expense
Increased interest expenses, opportunity risk, potential P&L impact
Optimize intercompany global cash liquidity
Internal cash is cheaper than external financing
4. Why fund your business with external funds?
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL.
Two teams using two strategies to find the same number
Indirect method: FP&A
Direct method: Treasury
Aligning methods allows treasury opportunity to contribute at board level
Alignment also directs mgmt focus on treasury initiatives – e.g. FX hedging
5. Direct or indirect?
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL.
Sleep peacefully at quarter-end
Real-time cash visibility and cash flow allocation automation creates certainty
“Will we hit our free cash flow target” is no longer a question; it is known
FCF targets are increasingly tied to executive compensation and public guidance provided to the investor community
6. Do have real-time insight?
Forecasting: Path to Success
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL.
Perfecting the Cash Forecast
Path to Success
a) Collaboration – involving the right people
b) Consolidation – incorporating the right data streams
c) Measurement – feedback loop to measure and report on forecast accuracy
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL.
Forecasting – Incorporate the right data
Sources to build the forecast
One-time entry
Import from internal systems (e.g. ERP)
Import from spreadsheets
Recurring cash flows
Extrapolation/Trending of historical data
Internal transactionso Target balancingo Payments
o Financial transactionso Invoice netting
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL.
One-Time Entry
Sometimes called “manual entry” We prefer to say semi-automated
All the benefits of Excel (type, tab, enter) plusaudit & controls of a workflow system
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Importing Cash Flows
Importing cash flows doesn’t need to be an IT exerciseoSystem should take any format, any ‘structure’, and allow
configuration in the system by the useroWant to import detailed numbers or import sum totals
and spread across days
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL.
Recurring Cash Flows
Repetitive cash flows can be modeled for any frequency, with variability by day, week, montho Best used to create a placeholder - which is later replaced with
more updated forecast data from other sources
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*Visibility*
Goal: Model and extrapolate forward historical cash flows
Steps:
1) Decide action and adjustments (e.g. average or trending of historic flows)
2) Select historic cash flows to extrapolate forward
3) Determine date/periods to project forward
Historical Data
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Steps:
1) Decide action and adjustments (e.g. average or trending of historic flows)
Cash Forecast Generation
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL.
Steps:
2) Select historic cash flows to extrapolate forward
Cash Forecast Generation
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL.
Steps:
3) Determine date/periods to project forward
Cash Forecast Generation
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL.
*Visibility*Steps:1) Decide action and adjustments
(e.g. average or trending of historic flows)2) Select historic cash flows to extrapolate
forward3) Determine date/periods to project
forward
Cash Forecast Generation
Reconciling the Forecast
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL.
Perfecting the Cash Forecast
Path to Success
1. Collaboration – involving the right people
2. Consolidation – incorporating the right data streams
3. Measurement – feedback loop to measure and report on forecast accuracy
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL.
Forecast Lifecycle - Reconciliation
*Visibility*
1
2
3
4
Important to capture in the database every stage of forecast (to later measure forecast accuracy)
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL.
Comparison of snapshots critical to measuring forecast accuracy (e.g. July 1 – Aug 31 as of Jul 1 vs. July 1 – Aug 31 bank actuals)
Forecast Accuracy – analyzing forecast variances
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL.
Require summary views with full drill down to cash flow details Important to have multiple comparisons
▪ e.g. Original budget plan vs. current forecast vs. hypothetical scenarios
Forecast Accuracy – analyzing forecast variances
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL.
Just like Excel – adding comments is a good reminder to yourself or notes to others analyzing forecasts
Ideally, comments available at both summary level and when drilling down to level of detail
Forecast Accuracy – analyzing forecast variances
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL.
Cash forecasting – final thoughts
Creating the cash forecast. Understand the objectives and benefits before rolling out cash flow forecast
exercise. Flexibility to align your data, the accuracy of the inputs will determine the best methods to
build your forecast effectively
Many reasons to forecast: Meeting the objectives of management and shareholders is critical. Cash
Forecasting is important if you are “cash rich”. Multinationals with significant foreign revenues must
forecast better in order to hedge effectively.
Measuring the forecast is the most important part of forecasting. Without measuring forecast accuracy,
it is impossible to know if you are good at forecasting.
ROI of cash forecasting is very high. Can be measured by investing longer with higher returns on cash,
repaying debt, earning yield from early supplier payments, and the value of foreign cash protected
through effective hedging
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL.
Treasury & Risk special report: A Clear View of Cash
Download at: http://www.kyriba.com/cash-forecasting-clear-view-cash-treasury-
risk-special-report
Additional Resources
Kyriba ebook: Six questions every treasurer should ask about their cash forecasting process - download at: http://www.kyriba.com/six-questions-every-treasurer-should-ask-about-their-cash-forecasting-process
Kyriba ebook: Perfecting the cash forecast - download at: http://www.kyriba.com/perfecting-cash-forecast-adding-business-value-organization
© 2015 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL.
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