Cash & Liquidity Management

A smooth flow

Published: Jul 2016
Abstract waterfall flowing down

An accurate cash flow forecast is a must for every treasury organisation. In fact, it is the fundamental piece of information on which all treasury decision making is based, and an inaccurate forecast can (and probably will) have a detrimental impact on treasury and business performance. Nevertheless, corporates around the world frequently cite cash flow forecasting, and achieving sufficient visibility over their cash more broadly, as being a key challenge.

For many organisations, the inadequacies around cash flow forecasting were brought to the fore in the wake of the global financial crisis (GFC). At this time, corporate boards turned, in the midst of the market chaos, to their finance function to find out how much cash they had and their exposures. Unfortunately, many treasury and finance functions simply could not deliver this information quickly and accurately.

Since then, the focus on liquidity management has grown as corporates in the region have looked to effectively manage the significant cash piles that were built up in the aftermath of the crisis. In more recent years, the economic uncertainly, evolving regulatory landscape and the growing scale and complexity of businesses across the region has made achieving an accurate and timely cash flow forecast a mainstay at the top of the treasurer’s priority list.

Where is my cash?

“Achieving an accurate cash flow forecast is the Holy Grail,” says Jeffrey Ngui, Head of Regional Sales, Cash Management, BNP Paribas. “But attaining this remains elusive for many of the region’s corporates.” At a fundamental level, this is because simply gaining visibility over cash on hand can be challenging – let alone predicting future cash flow.

There is a good reason for this. “Banking in Asia Pacific (APAC) is more fragmented – due to disparate infrastructures and regulatory environment – when compared to the US and Europe,” adds Ngui. “Banks like ourselves have invested to ensure that we are able to utilise all the data we have for the benefit of our clients’. For instance, we can provide information around our clients account balances across the world, in real-time and through a single channel which is flexible to match their technological capabilities.”

But this isn’t the case with all financial institutions. And whilst corporates may be able to obtain real-time visibility from the global and regional banks, this is not often possible when dealing with the smaller, less technologically advanced local banks – some of which do not offer basic tools such as an online banking platform or SWIFT connectivity.

In fact, the Cashfac Operational Cash Index, which recently surveyed corporate treasurers in APAC, supports this comment, as almost two-thirds of the corporates interviewed were unable to view their cash positions in real-time. “Of those who said they have a real time consolidated view of their cash, only an average of 54.8% said that all of their cash was visible in real-time,” says Alastair McGill, Managing Director, Global Business at Cashfac. “This leaves the rest of the cash to be consolidated manually in order to achieve a complete view of cash positions.”

Echoing Ngui’s comments, McGill highlights that the main reason for this is that the “number of transactional service relationships represents a complex management challenge for treasury functions.” That being said even those corporates with less complex banking arrangements – like those in Malaysia, who on average only use three banks, also struggle – and in the case of Malaysia have less visibility than their peers in Singapore and Hong Kong.

Seeing clear

To overcome this challenge, some corporates have looked to centralise their treasury activities, pooling cash into core operational accounts where possible and in some cases establishing in-house bank and on-behalf-of structures.

Cashfac’s McGill also outlines virtual accounts, or to be more accurate, virtual bank technology platforms, as being a potential solution to this challenge. “Virtual accounts have historically been one mechanism that corporates have used to inject accuracy and timeliness into their cash management processes,” he explains. “Today, virtual accounts have been surpassed by broader and more complete virtual bank technology platforms which harness advances in workflow, integration, matching, analytics and real-time reporting via functionally rich virtual accounts to provide greater flexibility, customer self-service.”

In this set-up, expectations of payments and receipts can be pre-populated against individual accounts so when money movements occur they are automatically reconciled against the expectations and an accurate real-time view maintained. This can also be connected to multiple banks through various channels to again enhance visibility and accuracy around cash flow forecasting – albeit around a limited scope of data fields.

Communicating the importance of cash flow

Yet, with these solutions still not widely used, corporates continue to have a lack of visibility over their current cash positions. As a result, treasurers are already at a disadvantage when it comes to creating an accurate future prediction of future cash flow. Unfortunately, the task doesn’t get any easier and as many treasurers can attest to, obtaining the required information for predicting future cash flow can be even more challenging than getting visibility over current cash. The key to this being that the necessary information resides in other business units and, all too often, these functions sit in siloes where communication with treasury is minimal.

This is a challenge that Russell Phillips, Head of Treasury, Asia Pacific at British American Tobacco (who outlines how his treasury has created a robust cash flow forecasting process see page 34) knows only too well. “There are many moving parts and stakeholders involved in the process – and it becomes more complex the larger and more diverse the business,” he says. “Also, many of these stakeholders in the individual business units do not see delivering a direct cash flow forecast as a key competency and deliverable in their role.” And if inaccurate or incomplete information is provided then this will lead to inaccurate forecasts and a subsequent incorrect assessment of cash needs by treasury. This can be a major risk for the entire company.

There is a requirement from the treasurer therefore, to make sure that the business units understand what the treasury is asking for and why it is so important that it is done correctly. “Education and clear communication is vital in achieving this,” explains Phillips. “Treasury needs to go out into the end market and ensure that they are very clear about what treasury is asking them to do. A benefit case will also have to be presented because without it you won’t change behaviour.” Phillips also highlights that senior management buy-in can also be key in changing behaviour across the organisation.

The role of technology

Whilst it is important that treasury communicate the significance of cash flow forecasting to the business, this is only one step on the way to improving the accuracy of the forecast. Once the information is received from the business units it needs to be consolidated. This, historically, has been a highly manual and cumbersome task which ultimately leads to errors.

“Cash flow forecasting, for the time being at least, still requires some manual work given that data collection involves multiple stakeholders – even with best-in-class systems,” explains BNP Paribas’ Ngui. “But, technology can add efficiency to the process.” He outlines that corporates can use their TMS or ERP system to improve the cash flow forecasting process. “Work for the treasurer will be greatly reduced if data input can be automated,” he adds. “The analysis, modelling and continuous management of the process becomes more effective as a result.”

Cash flow forecasting, for the time being at least, still requires some manual work given that data collection involves multiple stakeholders – even with best in class systems.

Jeffrey Ngui, Head of Regional Sales, Cash Management, BNP Paribas

Even if a company has constraints in technology investments, Ngui believes a well-constructed, well-defined and well-managed spreadsheet can still be an effective tool for treasurers to manage the information. “This data can then be uploaded into a TMS or ERP system which can automate the consolidation process and check this against the data that already sits in the system to eliminate errors and flag up anomalies,” he adds. “The analysis, modelling and continuous management of the process becomes much easier as a result.”

However, most corporates in the region still rely on spreadsheets as the sole tool to compile their cash flow forecasting and have very little automation. A recent study on FX by Deloitte highlighted this fact. “Thirty-five percent of corporates in the region didn’t use a TMS to manage their FX,” says Koh. For those that did, the vast majority focused on the operational elements and very few invested in technology to capture exposures. “Corporates need to reconsider this focus and spend another dollar to more effectively forecast and capture exposure,” adds Benny Koh, Managing Director – Treasury Advisor at Deloitte.

Guessing games

When the complexity around gaining visibility over cash is combined with the difficulty in receiving accurate and timely information and added to the burden of consolidating this, cash flow forecasting turns into somewhat of an (educated) guessing game.

“As it stands, many treasurers are faced with a poor set of numbers that they can’t operate effectively on,” says Koh. “Treasury, by its very nature, is a risk aware business and as a result, it is typical for it to use conservative estimates around cash in hand and utilise buffers around predicted cash flow.” And this can come at a cost. “A treasurer may not invest all its cash on hand, leaving idle pools sitting in low-interest bearing accounts around the world,” he explains. “Alternatively, they may invest too much and then have to draw on credit lines and incur interest charges. Consequently, treasury is left with a forecast that lacks clarity and contains numbers that cannot be trusted.”

Whilst, on an individual basis, these may be minor costs, sizeable and unexpected losses may also occur as a result of inaccurate cash flow forecasting. Take large FX hedging contacts, for instance. If the forecast is significantly wrong, treasury may be hedging a position that does not exist. This will expose the business to trading and open positions that are not backed up by real business flows.

Of course, achieving 100% accuracy in a forecast, especially for the longer-term view, is probably unrealistic. But that being said, it is clear that treasurers need to do more to increase accuracy and they need support from their banking partners, technology providers and the business units to do this.

Nevertheless, as British American Tobacco’s Phillips outlines on the previous page, with a mixture of internal endeavour when communicating with business units and the smart, yet not always complex use of technology, corporates are able to achieve high degrees of accuracy over their cash flow forecast.

Case study

Best practice cash flow forecasting: The British American Tobacco way

British American Tobacco

Here, Russell Phillips, Head of Treasury, Asia Pacific at British American Tobacco (BAT), outlines how his treasury have been able to tackle the discussed challenges and achieve greater accuracy over its cash flow forecast.

When the global financial crisis hit in 2008, BAT was one of many companies that found their cash flow forecast, and the process that supported it, was not good enough to deliver the information required in a timely fashion. Back then, data had to be pulled from numerous sources, all of which used different Excel templates. This was then manually consolidated before being presented to senior management.

A solid process

After 2008, BAT were given the mandate to deliver a more accurate and timely forecast. The treasury set about developing a robust process that would deliver 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 and supporting our FX risk management.”

With the objectives clear, and standardised forecast templates created, treasury then had to tackle the 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 the benefit for putting in the extra work.”

When doing such a project it can be easy to get quick wins. But, as Phillips points out, it can be just as easy for business units to slip back into bad habits. To limit the risk of this happening the treasury implemented a feedback loop to ensure that standards are maintained and to continuously drive for improvement. “It is vital to transform the perception of cash flow forecasting (CFF) and make it a key deliverable for the business units,” adds Phillips. “The aim is to create a cash conscious culture in the business.”

Treasury must not to be dogmatic in its approach. This was a key learning for BAT who initially set out to achieve 95% accuracy over its one month forecast. “Very few business units were able to achieve this despite the work they were putting in,” he explains. Not only was this discouraging, 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 an acceptable trade off versus the extra effort and resources required to get there.”

The technology factor

Once the information has been received it has to be consolidated and transformed into actionable intelligence. And Phillips is keen to highlight that complex technology is not always needed to do this.

“Initially we used a basic consolidation tool to complete our CFF,” he explains. “And we were able to achieve numerous value add benefits.” Phillips explains that on the FX side the treasury was able to copy and paste the information into an Excel model which calculated the data and suggested what hedges should be used in accordance with target hedge ratios within BAT’s FX policy. In more recent years BAT have migrated its CFF to SAP. “We have been able to take the standardisation and automation of our CFF to the next level as a result,” explains Phillips. “Our short-term forecast has been fully automated, whilst the medium-term forecast is now consolidated in SAP. We are then able to execute hedges using an online dealing platform which is integrated with SAP.”

Central benefits

The benefits of this project for BAT were multiple. Primarily the treasury was able to use the forecast for more effective decision making. “More confidence in the forecast allows the treasury to make bolder decisions in terms of group financing, for instance issuing less debt can lead to substantial interest savings,” says Phillips. “We can also be confident that we are reducing volatility by hedging currency exposures.”

In addition to this, the ability to create an accurate cash flow forecast allows the treasury to make a more fundamental change. “Treasury has been leading the way centralising and standardising over the past decade, and now the rest of the finance function is also aggressively standardising,” he says. “This has included leveraging financial shared services to do the transactional activity, allowing the business units to focus on their core function. We now have a centralised treasury shared service centre based in Bucharest. Without the accurate and automated cash flow forecast giving visibility to the centre, we would not have been able to achieve this organisational structure.”

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