Cash Flow Forecasting: Dedication and Discipline of Metrics Yields Improvements

October 15, 2012

Moderator: Cindy Gerhard, Managing Director, Citi Panelists:

Kabir Bhatia, Assistant Treasurer, Mattel Jeffrey Clennon, Director – Cash Management &

Funding, Discover Financial Services Chad Kibler, Assistant Treasurer, Belden

Cindy Gerhard, Managing Director Citi Transaction Services Global Liquidity & Investments

Product Management

Chad Kibler Assistant Treasurer Belden

Kabir Bhatia Assistant Treasurer Mattel

Jeffrey Clennon Director – Cash

Management & Funding Discover Financial Services

Market Practices in Cash Flow Forecasting

Cash Flow Forecasting Practices

37%

42%

39%

32%

50%

26%

26%

28%

53%

32%

16%

16%

33%

16%

18%

21%

16%

Time Horizon

Frequency of Forecast

Forecast Level

Forecasting Methodology

Forecasting Responsibility

NeuGroup GCBG World Class Principles of Cash Management, sponsored by Citi, 2011.

Central Treasury Regional/Local Treasury Other

Bottom Up Both Top Down

Legal Entity Both Consolidated

Weekly Monthly Daily Adhoc

Next Month Next Quarter Next 12 Months Other

Measuring Short Term Cash Flows % of Companies using the basis for estimating cash

flow

Basis of Estimating Cash Flow

Expected Terms or Patterns

Statistical Analysis of

Past Patterns

Internal Data

Collection Contractual Cash Flows

Other Historical

Bank Flows

Ope

ratin

g C

ash

Flow

s Receipts 47% 58% 53% 21% 16%

Payments 47% 47% 42% 26% 21%

Payroll 37% 42% 47% 5% 16%

Tax 11% 21% 84% 16% 5%

Trea

sury

Cas

h Fl

ows

Debt 26% 11% 5% 68% 0%

Intercompany 26% 16% 37% 26% 5%

CapEx & Acquisitions 32% 11% 89% 5% 0%

Equity 37% 16% 53% 32% 0%

61% - 100% 41% - 60% 16% - 40% 0% - 15% NeuGroup GCBG World Class Principles of Cash Management, sponsored by Citi, 2011.

What really works best?

Detail

Outlook Frequency

Process

CFF Process Design

Benefit of higher accuracy and frequency of

forecasts

Cost/benefit of time and resources to execute the CFF

process

VS.

Mattel

• One of the largest, global toy-manufacturers with market capitalization of ~$12B

• Highly seasonal business with large proportion of the revenues coming ahead of the traditional holiday season

• Global business – 48% of ‘11 revenue generated outside the U.S.

• Credit Ratings – BBB+/Baa1/A-; A2/P2 ratings for Commercial Paper

• Well-articulated capital deployment framework • Maintain $800MM - $1B in year-end cash to fund seasonal working capital • Invest $180MM - $200MM in capital expenditures annually • Return excess funds to shareholders through dividends and share repurchases

Background

TM

© 2012 Mattel, Inc. All Rights Reserved.

• Working capital intensive company with seasonal borrowing needs • Rely on commercial paper to bridge cash needs, which was problematic when the

CP market dried up in 2008 • Well-established shared service centers and centralized cash management further

alienates tangibility of cash for local finance teams • Emphasis on maintaining adequate liquidity but also returning excess cash to

shareholders

Challenges

Mattel’s Quarterly Cash Position

© 2012 Mattel, Inc. All Rights Reserved.

Results Initial Steps Taken to Improve Cash Forecasts

• Sensitized business units of the need for cash forecast accuracy, not “under promise/over deliver” approach

• Analyzed historical patterns in cash flows for receipts and payments, then solicited input from businesses to refine the outlook

• Isolated cash flow patterns that are largely consistent year over year and where prior year data can be used

Measurement of Results

• Cash forecast vs. actual variance conducted on a monthly and quarterly basis

• Introduced free cash flow as a part of the company-wide incentive structure

• Regular feedback and dialogue with subsidiaries to assist with accuracy of future forecasts

• Working with shared services center to create greater visibility to broad trends in cash flow

© 2012 Mattel, Inc. All Rights Reserved.

Discover Financial Services

Note: Balances as of May 31, 2012; volume based on the trailing four quarters ending 2Q12

• $47Bn in receivables • Leading cash rewards program • 1 in 4 U.S. households

• $28Bn direct-to-consumer deposits

• $10Bn personal loans and private student loans

Deposits and Other Lending

U.S. Card Issuing

• $149Bn volume • 4,300+ issuers

• $115Bn volume • 30+ issuers

• $29Bn volume

• 80+ licensees • 185+ countries /

territories

Direct Banking Payment Services

Challenges • In 2007 DFS was spun off from deep

pocketed parent changing funding dynamics dramatically

• During the financial crisis in 2008 & 2009 sources and uses of liquidity were scrutinized

• Certain funding markets, specifically ABS, became stressed which increased need for accurate forecasting

• Multiple forecasts were being generated, but difficult to discern “the truth” vs. other business estimates

• Changes in LOB and payment processing require forecast to be evolutionary, not static

Headquarters

90 Day Forecast

2 Week Forecast Centralized treasury aggregates forecast

input

Finance Business Unit

Business Unit

Business Unit

Product

Sub- Product

Sub-Product

Product

Sub- Product

Sub-Product

Product

Sub- Product

Sub-Product

Department level input provided to Treasury

Discover Cash Flow Forecasting Process

Results Initial Steps Taken to Improve Cash Forecasts • Process improvements to centralize cash management, control bank account opening and closing, have led to improved visibility and better optimization of cash • Created forecast narrative for regulators and internal constituents to describe details of process and benefits derived

Measurement of Results • Cash forecast is published weekly

and goes to the regulators • Metrics reinforce accuracy and

quantify business errors, a “look back” on what’s happened

• Ad hoc reviews conducted to understand errors and resolve them

• Continuous communication flow for results based feedback

• Back testing done for treasury only

Belden

Challenges Revised CFF Process

• Shift from a regional to a global forecast – centrally controlled and regionally executed

• Improved visibility and access to subsidiary’s excess cash for acquisition planning

• Tapped into internal liquidity, freed up cash and reduced external debt

• Improved the mobility of internal funding to subsidiaries

• Enabled dividend repatriation to occur on a more frequent and managed basis

Challenges Multiple regional processes

Inconsistent quality of forecast process and accuracy across the regions

Lack of visibility over excess cash to plan regular dividend repatriation process

Reduced ability to optimize strategic planning for acquisitions and estimate cost of funding

Results • Improvements in

quality of forecasts from all treasury centers

• Targets reduced from +/- 5% to $1mm per center

• Accuracy tracked in a weekly report for the coming 8 weeks, by geography, financial institution and currency CFF Entry – Hand-off to the next region

USA - HQ Excess funds dividend to HQ

EMEA Treasury Center Asia Treasury Center

GMT–6 GMT+8 GMT+1

Cindy Gerhard, Managing Director Citi Transaction Services Global Liquidity & Investments

Product Management

Chad Kibler Assistant Treasurer Belden

Kabir Bhatia Assistant Treasurer Mattel

Q & A

Jeffrey Clennon Director – Cash

Management & Funding Discover Financial Services

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Transaction Services

In fact, two thirds of respondents to the most recent AFP Liquidity Management Survey cited improving cash forecasting as one of their top priorities for cash and liquidity management.

There is no silver bullet to improving cash forecasts. However, certain actions can be taken, and others should be avoided, to get a clearer, more reliable picture of cash flow dynamics across the organization.

1. Do establish a defined process with clearly defined owners, and get buy-in.Get the right level of cooperation and make clear the organizational benefits of forecasting. Take the time to educate stakeholders and provide them with feedback on the results of their cash flow forecasts.

2. Don’t let everyone define their own source of information for the forecast. Know the sources of information and clarify how data is to be constructed so that you can further assess the quality of enterprise-wide, consolidated forecasts.

3. Don’t waste time perfecting templates.As silly as it sounds, putting together useful forecasting reports often gets mired down in aesthetics, such as which items to physically highlight or put in bold type. While reports must be easy to use and read, the real

focus must be on getting the content right, including line items, categories and time horizons, for example, and providing reliable information.

4. Do initiate projects that will simplify the cash flow forecasting process. Initiatives such as streamlining bank accounts and relationships yield economies of scale and also speed up data collection and cash forecasting processes.

5. Don’t ask the business units to prepare the full forecast for their entity. Break down your forecasts on a line item basis and identify the best source of content for each. For example, businesses will excel at providing revenue drivers, local trends and direct expenses. But procurement may be a better source for the timing of payments to be released under contractual obligations.

6. Don’t be satisfied with a top-down approach. Although it is more time-consuming, getting input on business trends and market activity at the local level to build bottom-up forecasts yields better results. Delve into activities at the business level to understand what is causing or will cause changes in them and combine top-down and bottom-up approaches to forecasting.

by Cindy GerhardGlobal Product Management Head of Liquidity & Investments, Citi

Best practices in liquidity management:Ten cash flow forecasting do’s and don’ts

As every treasurer knows, no discussion about liquidity management is complete without addressing cash flow forecasting. Today, as markets continue to gyrate, liquidity management and risk assessment remain both top of mind and part of business contingency planning, for treasurers and corporate boards alike.

7. Do automate. Technology is your friend. Put the right processes and systems in place to aggregate and report data enterprise-wide. Companies often have difficulty getting a real-time view of their cash positions and perform cash flow analytics without a global enterprise resource planning system or treasury management system. However, online treasury portals such as Citi’s TreasuryVision™ provide multibank data aggregation and reporting plus forecasting and analytic tools. TreasuryVision can be used as a standalone solution or as a complement to existing ERP and TMS platforms, making it easy to jump-start cash visibility initiatives while waiting for a large-scale single-backbone solution to come online.

8. Do benchmark. Learn from peers that have gone through similar experiences. Take advantage of benchmarking studies and tap information available through practitioner groups.

9. Do perform stress testing and scenario analyses. Move beyond developing a picture of cash access under normal conditions and develop “what if” challenges to analyze the impact of events and disruptions on your company’s cash position.

10. Never be entirely happy with your forecasts or processes. Build in continuous improvement. Constantly search for ways to improve the quality of data and to reduce variances.

Bottom line, treasurers equipped with reliable data, and sound insights, policies and technology, are in the best position to understand, manage and measure their company’s cash position and mitigate related risks.

Citi Treasury Diagnostics Research shows that CFF remains an area of focus, but companies still have room to improve — 80% still use manual inputs; more than 60% of participants have had to reverse or repair earlier cash positioning activity due to cash forecasting uncertainties.

Citi Transaction Servicestransactionservices.citi.com

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