effective cash forecasting: less complicated than you … · forecasting importance a division of...

© 2017 Treasury Strategies, A Division of Novantas, Inc.

A Division of Novantas, Inc.

Effective Cash Forecasting: Less Complicated than You Think!

Presented ToTEXPOApril 2017


Today’s Speakers

Thomas GavaghanManager, North American PresalesKyriba [email protected]

Jeff DiorioDirectorTreasury Strategies+1 [email protected]


Agenda

1. Framing Forecasting

• Objectives

• Issues

• Benefits

2. Best Practices

3. Leveraging Technology

4. Conclusion

Forecasting Issues, Challenges and Approach

A Division of Novantas, Inc.Forecasting Importance

Source: Treasury Strategies 2017 State of the Treasury Profession survey.

Rank2017

Rank 2016

Rank 2015

Cash forecasting

Financial risk management, FX

Treasury staffing levels and skill sets

Treasury functional organization

Treasury management systems

1

2

3

4

5

1

2

8

3

6

1

2

3

5

7

Bank relationship management

Best practices

Operational efficiency

Balance sheet optimization

Bank service fees

6

7

8

9

10

4

5

10

9

-

6

4

9

11

-


Forecasting as a Priority Because…

Avoids liquidity and capital issues

Maximizes the value of cash

Improves the effectiveness of risk management

Returns value to stakeholders

Improves the financial performance of the company

Supports Treasurer’s contribution to strategic planning


Why are there Barriers to Overcome?

• A majority of organizations indicate they are “less-than-satisfied” with their cash forecasting processes and forecast accuracy

• Many organizations face the same kinds of forecasting challenges

Insufficient resources Ineffective forecast methodology, tools

Poor information access/exchange Poor internal knowledge of cash flows

GIGO (accurate data sources) Low priority by senior management

Organizational complexity Inconsistency between short-term cash forecast and budget


Capital Budget vs. Liquidity Forecast

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Business Strategy

Capital Structure

Liquidity Forecast

Top-down (FP&A) vs. bottom-up (Treasury) approach to liquidity

Budget

Budget


Reconciling: Budget vs. Liquidity

• Reconciling budget cash with liquidity cash is difficult – there are differences

9

Budget

Pro Forma Financials

GAAP Accounting

Ledger Balances

Long-Term (1–5 yrs)

Periodic Updates

Liquidity

Manage Liquidity

Actual Cash

Available Balances

Less than 1 year

Frequent Updates

• Different goals

• Different perspective

• Different measure of cash

• Different time horizon

• Different schedule


Spreadsheet Limitations

Spreadsheets are easy…when your forecast is easy

Become less effective when integrating data sources

Not truly multi-user

• Lack controls

• Lack audit trails

Can’t store multiple versions

• e.g. variance analysis

Poor business continuity

7/14/14 7/15/14 7/16/14 7/17/14 7/18/14 7/21/14 7/22/14Mon Tue Wed Thu Fri Mon Tue

582.00 598.49 1037.44 1283.22 554.96 515.13 536.16

46.49 104.95 0.78 2.74 0.17 51.03 165.33(30.00) (30.00) (30.00) (30.00) (30.00) (30.00) (30.00)

(50.00) (10.00)(651.00)

(11.00) (100.00)

(125.00) (125.00)500.00 500.00

598.49 1037.44 1283.22 554.96 515.13 536.16 671.49

(250.00) (625.00) (1000.00) (1000.00) (1000.00) (1000.00) (1000.00)

Ending1Balance

CP=Outstanding

All#balances#are#in#MM

Netting=Payments/ReceiptsTreasury=WiresIC=Payments/Receipts=

Borrowing1ActivityCP=MaturingCP=Issuance

Expected=Payroll

Domestic1Cash1Forecast

Beginning1Balance1(MMF)

Cash1ActivityExpected=ReceivablesExpected=Payables

Forecasting Best Practices


High-level blueprint of the company’s financial future

Why Forecast?

• Ensure access to adequate capital – cash and credit

- Short-term à Liquidity planning [Treasury]

- Long-term à Capital planning [FP&A]

• Ensure effective working capital management: Is cash effectively deployed?

• Effectively manage risk: Where are we exposed (FX, interest rate)?

• Design a capital structure that supports business plan

• Anticipate impact on earnings, profits, EPS

12


Treasury Forecasts

They should be linked, but all have different objectives and uses

Near-Term Medium-Term Long-Term

Objectives Daily cash positioningInvest/borrow decisions

Liquidity planning, borrowing decisions

Long-term capital management and earnings protection

Horizon 1–4 weeks 13–18 weeks 12–18 months

Detail Most granular, account level details

Medium Summary level detail; focus on balance sheet, business categories

Frequency Daily Weekly Monthly or Quarterly

Update Intraday, as needed Weekly Monthly

Treasury can have multiple forecasts – different time horizons


Focus on Your Goals

Big picture

• Increasing investment income

- reduce idle or underinvested cash balances and increase returns on cash

• Reduce debt and associated interest expense

• Improving FX hedging effectiveness

• Minimize excess cash balances

• Repatriating cash from overseas

• Working capital improvement

Clear objectives

Audience

Time frame and frequency

Building the Forecast and Leveraging Technology


Determine the Forecasting Approach

Two distinct approaches

1. Direct (build from data)

• Specific known upcoming cash flows

• Estimate from history

2. Indirect (top down)

• FP&A approach


Liquidity Forecasting Cycle

17

CentralizedCollection Tool Forecasting

ModelVariance Analysis

Output Reports to

Users

Forecast Refinement Process

Data Sources

Business Units

Financial Units

Internal Systems

Bank Data

1. Data Gathering

2. Execution

3. Variance Analysis

& Analytics

4. Reporting

5. Refinement


Hierarchy of Data Modeling

Actual (source) Data

Recurring Flows

Simple Projections

Complex Modeling

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Find the Right Data Sources

Bank Reporting

CashForecast

Business Units

Spreadsheet Models

ERP

Investments and Debt Historical Data

Internal TeamsDerivative Positions Payments

Effective forecastingChoosing the right sources and models for the different

forecasting line items


Importing Cash Flows

Importing cash flows doesn’t need to be an IT exercise

• System should take any format and ‘file structure’ without IT help

• Want to import detailed numbers and/or import sum totals and spread across days

• Accommodate versioning of forecasts

Thoughts• Leverage what you have – ERP, Hyperion, FP&A tools

• Focus on automated translation and load (ETL) vs manual

• Include data repository owners in conversations


Recurring Cash Flows

Repetitive cash flows can be modeled for any frequency, with variability by day, week, month

• Best used - create a placeholder

• Later replaced with more updated forecast data from other sources


*Visibility*

Typical Workflow1) Decide action and adjustments (e.g.

average or trending of historic flows)

2) Select historic cash flows to extrapolate forward (dates and filtered query)

3) Determine date/periods to project forward

Simple Modeling – Projection of Data


Complex Modeling

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12, 24,36 month time-series

Regression analysis to determine factors

Model in system to apply factors to data

Seed Process (annually)

Forecast Process (Montly, Quarterly, Weekly)

Run forecast

Load actuals

Variance analysis to determine

adjustments

Apply adjustments

for next cycle


What-if Scenario Analysis

Building scenarios upon existing forecasts

• Changes in market conditions à impacts sales, supplies, inventory

• Changes in interest rates à impact on cost of debt

• Changes in FX rates à impact on exposures

Assessing Forecast Accuracy


Variance Analysis: What was Different?

1. Perform variance analysis• Forecast to Actual• Forecast to Forecast

• Multiple frequencies

2. Analyze forecast effectiveness• By line item• By time period

3. Report back to data sources or review model

4. Update the forecast with improved data

5. Rinse and repeat

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Forecast Accuracy – Analyze Forecast Eeffectiveness

Require detailed variance analysis to find the discrepancies

Need multiple frequencies – 3 month assessment insufficient

Data visualization can be easier to target problems

In Summary…


Cash Forecasting – Conclusions

Creating the cash forecast. Understand the objectives and benefits before rolling out cash flow forecast exercise. Flexibility to align your data, the accuracy of the inputs will determine the best methods to build your forecast effectively

Many reasons to forecast: Meeting the objectives of management and shareholders is critical. Cash Forecasting is important if you are “cash rich”. Multinationals with significant foreign revenues must forecast better in order to hedge effectively.

Measuring the forecast is the most important part of forecasting. Without measuring forecast accuracy, it is impossible to know if you are good at forecasting.

ROI of cash forecasting is very high. Can be measured by investing longer with higher returns on cash, repaying debt, earning yield from early supplier payments, and the value of foreign cash protected through effective hedging


Cash Forecasting – Final Thoughts

1. Comprehensive mapping of all cash flows and strong understanding of cash flow volatility drivers

2. Strong communication with providers of information

3. Tools that support data gathering, modeling and consolidation

4. Dynamic trending and variance analysis tools

5. Accurate assessment of aggressiveness/conservativeness level

• Evaluate the consequences of inaccuracy

• Review actions taken based on forecast


Questions?

Thomas [email protected]

Jeff [email protected]


About Treasury Strategies

Treasury Strategies, A division of Novantas, Inc., is the leading treasury consulting firm. Armed with decades of experience, we’ve developed solutions and delivered insights on leading practices, treasury operations, technology, and risk management for hundreds of companies around the globe.

We serve corporate treasurers, their financial services providers and technology providers for the complete 360°view of of treasury.

32www.TreasuryStrategies.com +1 312.443-0840

www.TreasuryStrategies.com/content/networkingcommunities11

@TreasuryStrat

www.youtube.com/c/treasurystrategiesincconsulting

• Bank Relationship Management• Technology Business Requirements and Gap Analysis• Technology Optimization and Updates• Technology Selection• Technology Implementation and Connectivity• Treasury Change Management and Resource Support

• Global Cash and Liquidity Management• Cash Forecasting• Financial Risk Management• Treasury Organization • Payments Strategy• Leading Practices Review and Benchmarking

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About Novantas, Inc.

Novantas is the industry leader in analytic advisory services and technology solutions for retail and commercial banks. We create superior value for our clients through deep and insightful analysis of the information that drives the financial services industry — across pricing, product development, treasury and risk management, distribution, marketing, and sales management.

With more than 200 professionals, Novantas and Treasury Strategies is a formidable team in both bank and corporate treasury markets.

For additional information, please visit Novantas.com

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About Kyriba

KYRIBA – THE GLOBAL LEADER IN CLOUD TREASURY AND RISK MANAGEMENT SOLUTIONS Kyriba’s suite of solutions gives finance leaders more insight at both operational and strategic levels, to position their organization for accelerated growth and maximum competitiveness. Kyriba delivers the full suite of treasury modules, from cash management to hedge accounting, and maintains the highest security standards. Our 100% Software-as-a-Service solution is categorized into five areas:

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