8/3/2019 Best Practices for Cash Forecasting

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Best Practices for Cash Forecasting

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Efficient and accurate cash flow forecasting helps make strategic debt, investment and working capital decisions. It may also bethe best technique to predict and obtain accurate ending cash balance positions a number Wall Street has come to use formeasuring management effectiveness.Cash forecasting is important for all treasurers and all businesses, says Dick Sherrod, Vice President of J.P. Morgan Treas uryServices Consulting and an expert on forecasting strategies. At the end of the day, the name of the game is how well atreasury department can manage debt and investments either by getting the best price for the debt they have to issue on aday-to-day basis, or by placing cash in the best investment vehicle to continue earning money.

Forecasting is a topic that is important no matter what happens economically, but it gets increased attention when companiesare cashstrapped or have a heightened concern around cash, liquidity and the visibility of it. In this time of tight liquidity, andwith market conditions changing daily, it may be a good time to review your current approach to forecasting and, if needed,make changes to assure you get the critical information you need.

As a Treasurer, there is nothing more embarrassing than to have your CFO call you to ask how much money you have andyou cant tell him on a real-time basis, says Sherrod.

So how can you and your company improve your current forecasting process? Sherrod suggests you f ocus first on establishinga disciplined approach, then setting expectations, and finally communicating and promoting the new approach religiously.

Establish a disciplined approachWhether a company is grow ing, stagnant or even shrinking forecasting requires establishing a disciplined process andsticking w ith it. Most companies need to forecast cash monthly so management can answer the question of whether they had agood month or a bad one. Publicly traded companies tend to require a three-month rolling cash forecast w ith an eye towardquarterly reporting. Most cash forecasts feed into a long-term forecast as well, w ith a different team looking at capitalbudgeting, the budgeting/planning process (usually a five-year plan) and strategic investments.

Best practices:1. Establish an owner for each functional area in each region (payables, receivables, credit, purchasing, sales, etc.). This is theforecasting team. (Note: it is best if the forecasting team member is the same person involved in the long-term budgetingprocess s ince the processes are intertw ined, and everyone can tweak their numbers along the way.)

2. Establish a standing weekly meeting, for example, 9:00 a.m. every Wednesday or whatever makes sense for eachgeographic region. It is important to establish and maintain the discipline of weekly meetings, even if you choose to cancel themeeting w hen there are few changes. Key stakeholders must be present or on the phone each week. The goal is to targetmonth-end projections, and each meeting works toward refining those projections.

3. Establish and distribute uniform information-gathering templates for all regions (these templates should not vary by region).Whatever people are doing in Asia, the people in Europe should be doing the same. Some of the terminology can be different,but the platform used should be fungible so the data can be merged into one global forecast.

4. Require each region to use the template, reporting in their operational currencies and either build a currency conversion intothe templates or have regional shared service centers consolidate information by currency. Use your ERP system conversionrate to convert to a single currency, your primary functional currencies, or both depending on your needs and requirements.

5. Within the template segregate or highlight significant and recurring quarterly items that do not change much to help focustime and attention on the important areas of weekly, notable changes. Payroll, debt obligations that pay every quarter, orroutine items such as interest payments on large revolving debt are areas that typically do not require much time or attentionfrom your reporting teams.

Set expectations and establish accountabilityOnce the forecasting team and approach is established, or an existing approach is modified, the forecasting team needs to setexpectations about forecast goals. Typically, it is not necessary to know every small item going in and out, so break downforecasts to the bulk amounts of data needed by category

(e.g., cycles, trends from month-to-month or week-to-week).

Best practices:1. Establish a primary point of contact in each region, and centrally, in case someone in the field learns about a big sale orpurchase between reporting cycles. These individuals are responsible for immediately communicating significant changes tothe owner of the forecasting process.

2. Establish disc ipline in how and when you use your ERP systems. ERP systems are wonderful tools that consolidate andaggregate information worldwide, if your forecast relies upon your ERP system and someone gets an invoice, puts it aside anddoes not enter it immediately, the forecast will be off. Timely input into accounting and ERP systems is one of the biggestproblem areas J.P. Morgan sees in companies. The obvious best practice is to enter every invoice and purchase order dailyalong the w ay, but establishing expectations and accountability that works for your company is key to successful forecasting.

3. Whether you hold divisions accountable by region, by line of business, or by function, it is important to call out whensomeone is not providing the right information. If lack of reporting caused the CEO to report a $100 million sw ing in cash, makesure the key contacts know it and understand the ramifications. For example, w as a Wall Street or a board expectationcompromised? Highlight cash generation and usage by unit or region w ith some kind of measurement. Highlight forecastanomalies and misses to focus more attention on them for the future. For instance, you can show that Europe was $200 millionoff on their forecast and ask them to explain. Calling out smaller discrepancies and inconsistencies early may avoid a bigger

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mistake later. Feedback is two-way, and it is important to consider establishing a way for participants to talk about what worksand what does not.

Develop and maintain a s trong communication strategyAfter establishing an approach, setting expectations and providing a feedback process, the next step required iscommunicating. For cash flow forecasting to be effective it must be recognized across the firm and it must be clear that it is astrategic part of the overall operational business. A good communication strategy can effectively deliver the message of whatyou want and why.

Best practices:1. Since the CFO and treasurer are the key accountable stakeholders that desire accurate cash flow information and reporting,they need to be responsible for clearly communicating the forecasting process and requirements. That means they should senda written communication that outlines expectations including templates, due dates, variances and accountability to everyperson in the company involved in reporting.

2. The manager leading the forecasting effort should get out and meet the people the forecasting team relies on. The goal is todemonstrate the value of forecasting from a strategic point of view and explain the ramifications of poor forecasting. Peoplewho work in accounts payable may not think they need to report to the treasury department about the $10 million about to goout the door. Someone purchasing new equipment may not think about the implications to treasury of that purchase and whenthe invoices are due. Sitting dow n face-to-face with purchasing agents, sales, marketing and others to build rapport can helpachieve your goal of a good, effective forecast.

3. Never stop communicating. Send reminders of when updates are due until the process takes hold. If you establish arecurring time each week when forecasts are due or when weekly meeting are held, send a reminder. At some point it w illbecome so routine as to recur on everyones mental calendar as well.

Reap the Benefits After all the hard work, treasurers can begin to reap the benefits of forecasting, which include:

Keeping abreast of key decisions made in the firm. Is there anything more frustrating for a treasurer than to find out at thelast minute that they have to come up with tens of millions of dollars or have tens of millions of dollars coming into theircash arena w ithout planning?

Becoming more of a strategic player in the firm. The value of forecasting has moved from obscurity to main stream,primarily because CFOs and CEOs are expected to know what their cash flows are from quarter to quarter. Effectivecash forecasting is about being intimately involved in the strategic decisions going on within the company and havingdiscipline around reporting the impacts of those decisions.

Helping achieve advantageous debt and investment rates.

Getting your firm on the right track to excellent forecasting may take several months, several communications, leadership andsome training. But remember that forecasting is a discipline, and implementing the right process often requires change-

management skills and time to gain buy-in and reinforce your needs. Once established properly, it w ill simply become businessas usual, and the treasury department can focus on making cash management decisions based on sound information.