Recession is now pretty much a certainty in many economies. In Europe, the cost of living is hitting home, and this winter will be a stark and serious problem for many people. In the UK, inflation is running at close to 10% and GDP is between 1-2% which implies a very real negative growth – even if GDP is growing it is only because prices are going up given demand is weak. We are at a time where there is very low unemployment; it’s an awful indictment that we are at almost full employment yet so many people are going to struggle to pay their bills.
It is essential that treasury teams are totally on top of their forecasting and planning process at times of such uncertainty, and when it is difficult to plan what might happen over the next 12-18 months. The forecasting process needs to be regular and monthly, covering a rolling 12-month period so that treasury forecasts 12 months from today, then in a month’s time, 12 months from that point. Keep it very concise, focus on getting information in front of management rather than trying to produce a set of accounts. It should be possible to see the forecast on a single sheet of paper, and it also needs to be integrated.
A common failure with forecasting is to only forecast profit and loss, or just forecast cash. Integrated means a forecast of P&L and cash in an integrated fashion. The forecast needs to come off the same base – profit generates cash and the two are linked. There is no need to populate anything like the numbers you’d collect for management accounts.
I would advise against using spreadsheets. Multiple spreadsheets are very time consuming to aggregate up. It’s all about getting the figures in front of management as quickly as possible and it could be out of date within a week or two. It is meaningless if it takes too long to put together.
The process will tell you how your cash is looking, your liquidity levels and headroom. It will flag if things are deteriorating and if treasury is getting close to its committed facilities. By integrating the reporting, treasury will also be able to see where the business model might be coming under strain, where sales are suffering most or costs going up sharpest. Treasury will be able to see if there is a need to adjust their business model or if they can ride it out.
If a corner of the business is struggling, it may need more investment or a change to the pricing strategy. For example, we are seeing many retailers begin to discount as demand drops.
Treasury teams should analyse their accounts receivable function, look down their list of customers to see who is at risk of not paying. If forecasts highlight some customers are taking longer to pay, treasury can set account receivables targets and offer discounts to those customers that settle earlier. Getting some cash is better than getting no cash. Insolvency is also an issue for key suppliers, as well as customers.
This type of forecasting doesn’t require a tech heavy, AI process. The information comes from the business, it is not about extrapolating numbers from the financial department. It involves talking to sales, account receivables and payroll and finding out what is coming in, and what is going out.