This issue’s question

“What would help treasurers overcome the major challenge of forecasting and liquidity planning and help gain the information needed?”

‘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.

Today, the role of treasurers has never been more important as businesses deal with the impact of the coronavirus and how crucial it is for them to forecast and manage their liquidity effectively to navigate through this period. Liquidity forecasting is a complex practice and there are many factors treasurers need to consider during the process.

1. Obtaining visibility of funds – the operations of MNCs are growing in complexity with multiple entities across different markets, currencies and time zones. Coupled with acquisitions and numerous banking relationships, it is vital to have visibility of their cash positions across the globe.
2. Efficient data gathering – treasurers should invest in capabilities that enable them to extract meaningful intelligence from the data generated through their operations. A common challenge is trying to aggregate a large volume of data across different sources and in different formats. Timeliness of data is also essential in ensuring they are receiving real-time insights in order to prepare for unexpected fluctuations in cash flow.
3. Strong business partner relationships – it is critical to keep strong stakeholder relationships with other business units within the organisation. It is imperative these business units recognise the importance of forecasting and take accountability in providing accurate information. Frequent and open lines of communication will educate and build knowledge of how forecasting ensures the organisation has sufficient funding at all times, and anticipate the likeliness of last minute requests which can then be handled with minimum disruption to cash flow.
4. Use the most effective method – a number of corporates are still using spreadsheets. although in recent years corporates have slowly started migrating to more sophisticated treasury platforms which can gather records from multiple sources, create consistent information and hold vast amounts of data though cloud software. This technology also allows for automation and easier trend analysis providing treasurers with the ability to make informed decisions about liquidity management.
5. Trend analysis – segmenting transaction flows is useful in tailoring the forecasting model further. For example, treasurers can section flows which are short term commitments related to the day-to-day operations of the business and likely to be reoccurring and longer-term commitments such as capital repayments and maturing investments. Identifying seasonal trends and behavioural patterns will help refine the model, reduce the element of surprise and increase predictability of cash flow requirements.