Treasury Practice

Protecting your assets

Published: Jan 2016
Rain drops falling from black umbrella

Cash flow forecasting is crucial to managing the financial health of a company and as such, it has remained at the top of the corporate agenda for some time now. But it can be one of the most frustrating tasks, partly because of inaccurate and untimely reporting from different business units. Is a simple or sophisticated approach best? Can technology make the job easier? Treasury Today goes back to basics to answer these questions and more.

A large part of the treasurers’ remit involves ensuring liquidity is managed well, in addition to cash being used dynamically as an asset of a business. At the point of consumption, cash should be where it is needed and available in the currency required; if there is surplus cash, it should be used to either meet shortfalls elsewhere in the company or be invested to earn a good rate of return. “These requirements are best supported through a combination of defined processes which support policy, people with the required skills to implement these and products (technology solutions) which facilitate accurate and timely projections of cash flows within a company,” says Kevin Grant, Member of the Executive Board at Hanse Orga.

But cash flow forecasting is notoriously problematic: variability in the amounts, currencies and timing of cash flows, as well as the impact of those changes which are unpredictable (market prices for commodities and FX rates and interest rates, for instance). The intrinsic issues related to the business – its infrastructure, business model and geographical spread – are also of consideration.

It’s not difficult to see why the task throws up many problems but, given its importance, cash flow forecasting must be become a finely-tuned practice for the corporate treasury department. “If you don’t forecast, then you’re not in a position to really understand with any level of confidence what decisions the business needs to be making,” clarifies Bob Stark, VP Strategy at Kyriba, a leader in cloud-based TMSs. Corporates understand the importance of the process, however. “Cash flow forecasting is one of the highest initiatives on the corporate agenda and this has been the case for many years.”

The process

Treasurers are required, above all else, to know where their company’s funds are, and why they are there. After all, the assurance is needed that if some unfortunate – and unexpected – incident occurs, the cash supplies will not fall short. What’s more, forecasting is increasingly important in determining the investment strategy of a company. These factors entail active oversight. Cash flow forecasting, therefore, requires a myriad of different technology systems and applications, including accounting, treasury management systems (TMS), enterprise resource planning (ERP), spreadsheets and emails to (somehow) present a consistent and integrated view. Only then can the questions such as ‘how much cash does the company have?’ or ‘what is the cash flow over the past six months in a certain subsidiary or currency?’ be answered with any degree of certainty. But the data sources – including details of thousands of customers and potentially hundreds of bank accounts – are held in multiple places and systems. Consequently, the first step towards accurate forecasting is to establish a single source of the truth.

A complete picture

Gaining visibility of cash positions for all subsidiaries within a group was frequently mentioned as a challenge by respondents to a recent Treasury Today European Corporate Treasury Benchmarking Study. Some corporates noted improvements made through introducing short-term cash flow forecasting for pool participants, moving away from manual payments and replacing local online banking solutions with centralised collection of bank statements, for instance. And although technology plays a critical role in forecasting, some respondents to Treasury Today’s Benchmarking Study said that they were ‘trying to obtain the most value out of the data and technology that [they] already have’. Grant adds: “If a corporate is moving away from spreadsheets to use systems in an integrated way to pull cash information together from numerous sources – that, historically, has been quite complicated to achieve.”

The products

What solutions are available to corporates, to ease the strain, then? At Hanse Orga, for instance, a SAP-integrated cash flow forecasting solution is offered which takes into consideration a considerable amount of “master data” to generate relevant forecasts. “There may be underlying data in other modules of SAP which we bring together to give clients a consolidated picture of the company’s short to medium term cash requirements,” explains Grant. Hans-Gerd Riediger, Solutions Architect at Hanse Orga uses the example of accounting data: “We incorporate accounts receivables, accounts payable, payment data and payment behaviour – information that is typically used for accounting purposes – in the forecast.” Data from some sources external to SAP can also be imported.

According to Kyriba’s Stark, asides from systems allowing you to build a forecast, technology also affords you the benefit of “measuring the effectiveness or accuracy of that forecast”. Although Microsoft’s Excel application boasts simplicity and low costs, the software’s dependency on the human aspect of the data collection and input required leaves it open to error. The case against the use of spreadsheets in cash forecasting is bigger than that, though. “What treasurers find out pretty quickly with spreadsheets is that – never mind being a lot of work and having the potential for error – the mechanics of what they need to do are beyond Excel’s ability,” says Stark. Treasurers want to be able to monitor the accuracy of forecasts by comparing historic flows anticipated against the actual flows the business is experiencing. For this part, there is a reliability gained by using products that reconcile how accurate forecasting mechanisms are, compared to spreadsheets that don’t allow automated process monitoring to take place. Systems are most often connected via the internet allowing subsidiaries to enter data required for forecasting into one database which can be analysed centrally.

All of the leading treasury vendors offer cash flow forecasting within their treasury systems. SunGard, for instance, offers integrated cash flow forecasting with its CashPredictor integrated within its AvantGard product to provide real-time visibility on cash positions globally in a user-friendly manner accessible to all treasury staff. Likewise, Wall Street Systems incorporate a cash flow forecasting system into their Wall Street Suite which enables functionality between business entities, and allows subsidiaries to submit the forecast directly to the treasury on a timely basis.

Kyriba have web-based applications such as KyribaTi that are available through partnered financial institutions, and offer cash flow forecasting and other treasury management solutions over the internet too. “As opposed to Excel, you can use flexible data sources – from overseas for remote offices, from regional controllers or historical information, for instance – to ensure you are not constrained by your model,” says Stark. Treasurers can then understand how accurate their company’s forecasting processes are – and adapt accordingly. “A system offers all of these things: the automation as opposed to manually creating formulas and the ability for data analytics to measure the effectiveness of the forecast.”

What’s more, “technology vendors will hold discussions based on a company’s individual needs – including what the business life cycle is and what IT infrastructure is currently in place – in order to find the best solution” says Riediger. The resounding advice: to embrace technology and make it work for you. This means it must be calibrated for your organisation as there could be a lot of technological power that isn’t being used to its full potential. Other tips include:

  • Integrate systems.

    The more operational systems you can integrate as sources, the better the forecast will be. This means the systems in place need to be able to ‘speak’ to each other.

  • Automate (as much as possible).

    The procurement of cash balances on a daily basis for all accounts, for instance, should be automated.

  • Define the terminology.

    The difference between short-, medium- and long-term forecasts, their parameters and usage should be understood by all subsidiaries involved.

  • Ensure processes are standardised.

    Employees must be able – and willing – to follow corporate policy. In order to capture the data needed for analysis, all subsidiaries must be following the same practices.

  • Maximise internal relationships.

    Efficient cash flow forecasting means working closely with planning and budgeting to ensure both profit and loss cash perspectives are generated. Maintaining good relationships within the business will help guarantee updated forecasts are reported.

  • Request feedback.

    Going back to the subsidiaries to give, and receive, feedback will help fine-tune the process. This will give you an idea of how well subsidiaries have done – think about attaching a KPI measure to cash flow forecasting to incentivise improvement to information.

  • Make people accountable.

    It is sometimes advised that, in order to avoid the task becoming a cut and paste job with inevitable errors, people should be held accountable for forecasting errors.

Operating in a cost effective manner

For those who need to make the key business decisions, having a solution that enables access to a complete picture of cash is one of foremost benefits. But the value of a forecast is beyond just saving the time and effort of going to multiple data points. “It’s about doing the forecast properly which yields the ability to make better decisions,” says Stark. For example, if a company has excess cash, being able to put that to better use and earn returns or, if in a borrowing situation, being able to borrow more effectively – getting better rates or looking at different sources of capital, perhaps. Hedging programmes can also be that bit more effective as treasurers are in a better place to protect and predict what the cash flows are going to be. As Stark says: “If you don’t have good opportunity to project what those cash flows in foreign currencies are going to be, then you’re subject to the roller-coaster of volatility.”

In addition to benefits felt across investing, borrowing and FX management, there is a case for a fourth benefit in terms of cash mobility, according to Stark. When companies have different pools of cash globally, treasurers will want to optimise the use of these pools. Improved cash flow forecasting and visibility makes sure cash can be mobilised and deployed in the areas of the organisation where it is needed, hence preventing pockets of cash remaining unleveraged.

The resounding advice: to embrace technology and make it work for you. This means it must be calibrated for your organisation as there could be a lot of technological power that isn’t being used to its full potential.

Further spinoffs of cash forecasting projects include understanding the (often complex) bank account structure within a company and the possibility of embracing supply chain finance solutions, comments Hanse Orga’s Grant. “eBam applications can offer significant improvements around the administration and bank fee analysis of the companies in-country bank accounts; any cash forecasting system must begin with bank account visibility. With improved cash forecasting you can start to consider the return you receive on surplus cash held at the account level, compared to improved returns available by actively using this cash. An example would be to consider shortening your DPO in return for a discount on the accounts payable invoice value which could be quite a compelling proposition in the world of ultra-low interest levels we see today.” As briefly explained above, if cash needs are not going to be met by the cash flow into the organisation, advance notice can also ensure treasurers borrow cash at a lower cost than may be required if they just look at short-term funding instruments.

Overcoming issues

The case for specialised software has certainly increased over recent years but regardless of the technology implemented, there are still some issues that need to be addressed when it comes to liquidity forecasts. One of the major factors that affects the accuracy of forecasts is the communication of inaccurate figures from departments and subsidiaries.

Without a doubt, however, the benefits of getting the process right are recognised by corporates. “Ten years ago, CFOs and treasurers would come to us and ask what we could do for them in terms of cash flow forecasting. Now, they know the answer and what they want to accomplish. They just want to make sure they have the best tools in front of them,” explains Stark. It isn’t a matter of education, but rather how to fine-tune the process which is so vital for cost effective business.

Cash forecasting: a checklist

In addition to making use of the technology on offer, the best way to improve cash forecasting, according to Treasury Alliance Group, is to evaluate the current process against four other best practices of cash forecasting.


A cash forecast requires two pieces of accurate information: the amount of cash on hand and the amount to be received net of expenses. Add the dimensions of time and currency; when will the cash be received, and in what currency and you have a reasonable and very effective cash forecast.


Good quality forecasting input is the primary determinant of a good quality forecast. And the quality of the input is in the hands of your business partners. Building trust is therefore an important step in this process.


Forecasting in a global company adds the challenge of multiple currencies, language and culture. It is critical that all business units adopt common definitions in the cash forecasting process.


Cash forecasting problems arise when business units lose faith in central treasury’s ability to respond to their urgent funding needs in a timely manner. They respond with excessive caution in forecasting receipts and even hold onto their own cash reserves, diluting the accuracy and value of the forecast. The solution is to have an efficient account structure serviced by a reliable network of banks.

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