‘If you fail to plan, you plan to fail’ applies aptly to liquidity planning now more than ever. Forecasting and liquidity planning is a fundamental task in treasury processes. Companies adapt their levels of forecasting based on needs – ranging from daily to yearly.
The following can be considered as key components of forecast and liquidity planning:
Payments: representing the obligation of the entity and includes intra group and external suppliers. Payment calendars or fixed payment days help a lot in forecasting and controlling the cash needs.
Collections: this is the most challenging part of forecasting, especially with external customers, since it involves several variables.
Payroll and taxes: relatively fixed and generally obligatory, based on regulations in specific countries. Entities should carefully consider any incentives, subsidies, tax recovery and tax benefits applicable in respective countries.
Credit facilities: treasurers need to recognise the difficulty of organising new, or increasing existing credit facilities in the very short term, as financial institutions face liquidity challenges and market risks are priced in. Supply chain financing and factoring arrangements will also help greatly on forecasting and liquidity planning.
It is recommended to follow a ‘LIQUID’ approach, in gaining access to valuable data.
L – Limited demand
Try to use existing reports or data, to minimise additional requests to different teams. Similar to treasury, other teams are also likely to have new challenges in times of a crisis, alongside their regular work demands.
I – Information flow
It’s suggested that the information flow should be direct from the person who holds the data or creates the report to the treasury team. The information flow should include a feedback mechanism, which will help to fine tune data wherever possible. To facilitate easy flow and to ensure minimal additional effort, information can be accessed from common drives or systems, or the treasury team could be simply added in copy of an email.
Q – Quick turnaround
To achieve quick access to information, treasurers need to trade-off between actual numbers to the last dollar versus estimated value. For example, the precise amount for value added tax payable is generally available just on the day itself or one day before, whereas rough estimates can be obtained at quite an early stage.
U – Understand the business
It is important to understand the business model and product lines well, to appreciate the flows better and to realise any possible impacts due to the market situation. Often, this may not be a favourite area for finance teams or those working in regional centre atmospheres and away from the central businesses. Strong partnership and close communication with local teams will help a lot in this regard.
I – Integrate the systems wherever possible
It is possible that companies end up with multiple different systems for various processes, which may not interact with each other. Typically, the situation is more complex in large entities with different levelled versions. Integrating the information flow between different software is key to eliminating manual processing as well as the related delays and errors.
D – Differences to be recognised
It is important to understand differences in objectives between various contributors, so treasurers can better appreciate the data and use it effectively. For example, credit teams are likely to focus on collecting funds within the invoice due date, whereas treasury is more focused on the value date of receiving funds.