All treasurers want an accurate cash flow forecast. But many are still struggling to attain this. Here, Treasury Today Asia talks to Russell Phillips, Head of Treasury, Asia Pacific at British American Tobacco, who outlines how the treasury have been able to achieve greater accuracy over its cash flow forecast and how you can too.
In 2008, when the global financial crisis hit, British American Tobacco were one of many companies that found out that their cash flow forecast, and the process that supported this, was not good enough to deliver the information that senior management required in a timely fashion.
Back then, the treasury team was required to pull data from numerous sources, many of whom used different Excel templates. This information then had to be manually consolidated before being presented to senior management. “The process took a few days and by the time we had the final forecast a lot of it was out of date and couldn’t be trusted,” explains Russell Phillips, Head of Treasury, Asia Pacific at British American Tobacco (BAT).
And this is a challenge that many treasurers today may still relate to. According to Phillips, “this is because achieving an accurate and timely cash flow forecast is a complex process with many moving parts and stakeholders, many of whom do not see delivering a direct cash flow forecast as a key competency and deliverable in their role.”
Further complexity can also be found in the design of forecasts. “Numerous line items can be included in a forecast,” he explains. “And it can be very tempting to include as many as possible. But rather than give more visibility over cash flows this is more likely to increase the chance of errors in the forecast.”
The BAT approach
After the events of 2008, the BAT treasury team was given the mandate to deliver a more accurate and timely forecast. The first question they asked themselves: what do we want the cash flow forecast to achieve? “Each company will have different requirements and the approach depends on their objectives,” explains Phillips.
For BAT, the team required a medium-term (18 month) monthly multi-currency forecast and a short-term (one month) daily forecast.
“The short-term forecast is for daily cash management purposes, and all companies will need this,” he says. “The medium-term is for forecasting our funding needs – be that at an end market level or at the PLC (group level funding). It is also a big enabler for our FX risk management.”
With the objectives clear and the standardised forecast templates created – where the line items were greatly reduced and simplified – the treasury then had to tackle the big challenge of conveying the importance of an accurate cash flow forecast to the business units.
“Education, communication and achieving management buy-in is critical at this stage,” say Phillips. “Those providing the reports need to be very clear about what you are asking them to do and they also have to see a benefit for putting in the extra work.”
A holistic process
When doing such a project it can be easy to get a quick win. “After the initial conversations the business units may put extra effort into their forecast and you will achieve greater accuracy for a short period,” says Phillips. But, as he points out, it can be easy for business units to slip back into bad habits.
To limit the risk of this happening the treasury implemented a continuous feedback loop which looks to ensure that standards are maintained. “Many companies overlook this or do not pay significant attention to it, but the feedback loop is essential in driving consistently better performance,” he says.
The business adage ‘what gets measured, gets the focus’ rings true in this respect. “It is vital to transform the perception of cash flow forecasting and make it a key deliverable for the business,” adds Phillips. “Another key objective of the project should be to create a ‘cash conscious’ culture across the business.”
Treasury as well must not be too dogmatic in its approach. This was a key learning for BAT which initially set out to achieve 95% accuracy over its one month forecast. “Very few business units were able to achieve this,” he explains. “So whilst they may have improved their accuracy from 60% to 80% we still had to mark their performance down.”
Not only was this demotivating given the effort being put into the project, it also caused some unintended consequences, such as payments being delayed in order to hit the forecast target. As a result of these factors, BAT reduced the accuracy target to 85%. “We concluded that for what we wanted to achieve, the difference between 95% and 85% accuracy was negligible in comparison to the extra effort and resources required to get there.”
The technology factor
Of course, receiving the information is only one part of the jigsaw. It then has to be consolidated and transformed into actionable intelligence. And whilst there are a number of smart solutions that enable this, Phillips is keen to highlight that these are not always necessary.
“Initially we used a basic consolidation tool to complete our cash flow forecasting,” he explains. “And we were able to achieve numerous value add benefits with this.” Phillips explains that on the FX side the treasury was able to copy and paste the information from the consolidation tool into an Excel model which was created in-house. “This calculated the data and suggested what hedges we should place in accordance with our objectives and treasury policy. This was very effective and achieved without a complex TMS or ERP system.”
That being said Phillips is well aware of the benefits more advanced technology can offer. BAT have, in recent years, undergone a large-scale SAP project that has allowed the treasury to migrate its cash flow forecasting onto the ERP. “We have been able to take the standardisation and automation of our cash flow forecasting to the next level as a result,” explains Phillips. “Our short-term forecast has been fully automated as all the data already sits within the system, whilst the medium-term forecast is now uploaded and consolidated in SAP. We are then able to action hedges, for instance, straight from the ERP into our dealing platform, offering straight-through processing.”
But, for those treasury departments that are less technologically advanced, the BAT case highlights that best-in-class technology is not always needed to achieve a robust and accurate cash flow forecasting process.
Many of the benefits that can be derived from accurate cash flow forecasting are very apparent. These include helping the treasury to make the right decisions around liquidity and cash management as well as FX hedging and risk management.
And there is of course an economic impact associated with this. “More confidence in the forecast allows the treasury to make bold decisions in terms of financing, for instance, which can lead to a substantial saving,” says Phillips. In fact, BAT has calculated that an initial 5% improvement in accuracy accounted for around £10m per annum in cost savings.
In addition to this, the ability to create an accurate cash flow forecast can allow the treasury to action more fundamental change. “As a financial organisation we have been aggressively standardising over the past decade, with treasury leading the way,” he says. “This has included leveraging shared services to execute transactional activities, allowing the business units to focus on their core function. Without the accurate and automated cash flow forecast process giving visibility to the centre, we would not have been able to leverage this organisational structure. It is a key piece of infrastructure in our set-up.”