cash flow forecasting: tools and techniques for success
TRANSCRIPT
Cash Flow Forecasting: Tools and Techniques for Success
Angel Yang
Sr. Manager, Cash Forecasting and Planning
Yum! Brands, Inc.
Nishat Grover
Director, Global Treasury Operations
Yum! Brands, Inc.
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Cash Flow Forecasting Agenda • Session Objectives
• Why Do We Forecast Cash?
• Types of Cash Flow Forecast
• Case Overview
• Short Term Cash Flow Forecast
• Medium/Long Term Cash Flow Forecast
• Summary
• Q&A
2
Cash Flow Forecasting Session Objectives
• Understand the different types of cash flow forecasting and their uses
• Understand the basic requirements of developing a “direct cash flow” forecast from the ground up that is effective and useful
• Understand the communication aspect of forecast reporting
• Understand challenges and how to manage them
Case Study Format
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Cash Flow Forecasting Why Do We Forecast Cash?
• Liquidity Management
• Financial Control
• Strategic Objectives
• Capital Budgeting
• Cost Management
• Currency Exposure
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Cash Flow Forecasting Types of Cash Flow Forecasting
• Short Term
• Medium/Long Term
Receipts and
Disbursements Method
Distribution Method
Pro forma Statement Method
Adjusted Net Income Method
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Case Overview
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Cash Flow Forecasting Who is Yum? • The world’s largest restaurant company in terms of system
restaurants with about 38,000 restaurants in more than 110 countries and territories
- Over 7,300 company owned (approx. 30% U.S.; 70% International)
- Over 30,500 franchise/JV owned/licensed
• Three major restaurant brands: KFC, Pizza Hut and Taco Bell
• Publicly traded company on NYSE, Tickler symbol “YUM”
• Fortune 250 company
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Cash Flow Forecasting Yum! Has A Global Portfolio
Profit from Our International Business Has More Than Tripled since 1998
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Cash Flow Forecasting Organization Structure
- Short Term 90-day CF Forecasting - Daily Reconciliation of Forecast vs Actual
VP, M&A & Treasurer
Connie Hayes Badon VP, Asst. Treasurer
Global Cash & Capital Markets
Angel Yang Sr. Mgr, Treas.
Forecasting & Plng
Nishat Grover Director, Global
Treasury Ops
Int’l Cash Desk Manager
Treasury Analyst
Domestic Cash Desk Manager
Yum! has a centrally managed treasury structure *
* Exception is international business units manage their in-country cash positions.
Sr. Manager, Global Cash
Management
Sr. Manager, Capital Markets
Treasury Specialist (PT)
Int’l Treasury Analyst Int’l Cash Desk Manager
- Long / Medium Term CF Forecasting & Planning - Interest Forecasting & Planning - Cash Repatriation Planning - Scenario Analysis
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Cash Flow Forecasting Bank Account Structure
Yum! Central Master Account
Depository A/c 1
Depository A/c 1
Depository A/c 1Stores
Depository
Concentration
Accounts
Concentration Same Day 90%Next Day 10%
Brand LockBox Accounts
(Royalty and A/R Collection)
Yum! Master
Control
Disbursement
Account
Franchisees
Brand A/P and
Payroll
Accounts
Brand Master
Accounts
DailyDrawdown
Misc Receipts(eg, Refranchising
Proceeds, Payroll Tax)
Misc Payments (eg, Property
Purchases, Sales Tax, etc.
Establish Daily Net Position
Stores
Stores
Net cash position determined at a central “master” bank account level.
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Cash Flow Forecasting Yum Case Study Assumptions/Overview
• Global retail business with minimal receivables (Royalties)
- Yum calendar comprises 13 four-week periods
• ST Forecast prepared using Receipt and Disbursement methodology
- Maintained in Excel Spreadsheets
- Automated process to pull actual data using links
• Medium/Long Term forecast prepared using Adjusted Net Income methodology
• ST forecast aligned with Long/Medium Term forecast periodically to maintain forecast accuracy
• Thomson Treasury Workstation
- Central database of historical data
- Used to pull actual data for forecast reconciliation purposes
Note: Case data is for illustration only. No actual data used.
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Cash Flow Forecasting High Level Process
Gather Sources/
Uses of Cash
Reconcile Short Term with Medium/Long
Term Forecast
Review Historical Trends, Fine Tune Data &
Scenario Analysis
Update & Reconcile with Actual
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Short Term Cash Flow Forecasting
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Short Term Cash Flow Forecasting Overview • What is ST forecasting?
- Lifeblood of treasury operations - Critical business process that enables us to manage daily liquidity and short term investment and borrowing decisions - Daily US consolidated cash flow forecast for rolling 90-day period
• Answer these questions:
- How much cash will I have? - How much cash will I need? - When will I need it? - Where will I get it?
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Short Term Cash Flow Forecasting Cash Receipts – Key Sources
Company Store Sales - Future CF forecast based on Trend Analysis using historical actual data
Franchise fees (royalties) -Domestic - International
Store Refranchising Proceeds - Based on data from M&A
Daily Cash Position Forecast
As of 08/22/2011 09/05/2011 09/06/2011 09/07/2011 09/08/2011 09/09/2011
Mon Tue Wed Thu Fri
Beginning Cash Position 930 930 1,404 178 420
CASH INFLOWS
DRAWDOWN - 4,661 4,355 3,345 2,809
CASHCON - 363 579 149 1,053
ROYALTIES - 140 73 51 43
PROPERTY SALES - - - 53 321
STOCK OPTIONS - 1 180 172 915
GIFTCARD - 17 42 (32) (19)
REFRANCHISING PROCEEDS - 1,300 - - -
STOCK OPTION PROCEEDS - 16 220 176 780
- 6,497 5,449 3,915 5,902
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Short Term Cash Flow Forecasting Example – Use of Trend Factors
Trend factor selected Is conservative and
represents recent experience Wide range of Trend Factors
1.1001 Blended Factor YTD 2011
1.1219 Blended Factor Q1 2011
Actuals Actuals Rate
2010 2011 Change
Draw downs A B B / A
P1 383,794 411,735 1.0728
P2 409,837 474,259 1.1572
P3 416,015 471,083 1.1324
P4 406,687 448,901 1.1038
P5 406,396 444,514 1.0938
P6 398,240 440,211 1.1054
P7 409,810 440,086 1.0739
P8 406,935 451,230 1.1088
P9 405,420 425,381 1.0492
P10 396,539 435,512 1.0983
P11 92,753 102,998
Average 1.0996
1.1010 Blended Factor Q2 2011
1.0773 Blended Factor Q3 2011
1.1006 Blended Factor P10 & P11 2011
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Short Term Cash Flow Forecasting Example – Use of Trend Factors
Trend factors applied to ’10 data to forecast
‘11 cash receipts
New Trend factors calculated based on
’11 actual
Review and adjust for business specific
Events / holidays
Mon Tue Wed Thu Fri Mon Tue Wed Thu Fri
Actuals - 2010 ($) 31,260 22,414 19,602 12,149 10,778 33,971 29,817 24,107 18,095
Trend Factor 1.0773 1.0773 1.0773 1.0773 1.0773 1.0773 1.0773 1.0773 1.0773
Forecast - 2011 ($) 33,676 24,147 21,117 13,089 11,611 36,597 32,122 25,971 19,494
Actuals - 2011 ($) 33,401 23,900 21,900 13,698 11,720
New Trend Factors 0.9918 0.9898 1.0371 1.0466 1.0094
Expected Distrib.
by day of week 30% 26% 18% 13% 12%
Actual Distrib. 32% 23% 20% 13% 11%
P09 Week 2 P09 Week 3
LABOR
DAY
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Short Term Cash Flow Forecasting Cash Disbursements – Key Line Items
Repetitive Payments - $ amounts known
AP calculated based on trend factors - comparing PY vs
Current YTD data OR using % of Sales method
Repetitive Payments - $ amounts unknown until shortly prior to payment
One-time / ad-hoc payments
Daily Cash Position Forecast
As of 08/22/2011 09/05/2011 09/06/2011 09/07/2011 09/08/2011 09/09/2011
Mon Tue Wed Thu Fri
Disbursements
AP / PAYROLL / CAPEX - (3,682) (1,714) (1,968) (1,647)
401K CONTRIBUTIONS - - - - -
BANK FEES - - (134) - -
FX SETTLEMENT - - - - -
PENSION - - - - -
PROPERTY PURCHASE - - - - -
INTERCO-LOANS / TRNSF - - - - -
STATE TAXES - - - - -
FED TAXES - - - - -
DIVIDEND - - - - -
MISCELLANEOUS - - - - -
SALESTAX - (123) (123) (123) (123)
PAYROLLTAX - (103) (0) (74) (207)
BENEFITS - (81) (84) (140) (47)
REPURCHASE ACTIVITY - (603) (604) (602) (493)
Total Disbursements - (4,592) (2,525) (2,907) (2,516)
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Short Term Cash Flow Forecasting Disbursements –% of Sales Method
Can also use 2011 actual data
Mon Tue Wed Thu Fri Mon Tue Wed Thu Fri
Actual Sales - 2010 ($) 31,260 22,414 19,602 12,149 10,778 28,703 24,880 24,562 14,434 13,411
Actual Control Disb. 2010 ($) 24,483 17,286 15,091 9,553 8,356 22,343 19,659 19,360 11,210 10,312
2010 Actuals - Control Disb / Sales (A) 0.7832 0.7712 0.7699 0.7863 0.7753 0.7784 0.7902 0.7882 0.7766 0.7689
Forecast Sales - 2011 33,676 24,147 21,117 13,089 11,611 30,922 26,803 26,461 15,550 14,447
Forecast Control Disb applying (A) above 26,375 18,623 16,257 10,292 9,002 24,070 21,178 20,857 12,077 11,109
P011 Week 2 P11 Week 3
Control Disbursements (Comprises AP, Payroll and Capex)
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Short Term Cash Flow Forecasting Daily Net Cash Position
Used to manage borrowings /
credit facility usage
POSITION (14,630)
ON - Borrowing/(Investment) 14,700
Est. Ending Balance 70
Total Swingline Borrowings 14,700
Total Revolver Borrowings 35,800
Total Borrowings 50,500
Outstanding LC's 36,905
Total Credit Facility Usage 87,405
Daily Cash Position Forecast
As of08/22/2012 09/05/2011 09/06/2011 09/07/2011 09/08/2011 09/09/2011
Mon Tue Wed Thu Fri
Beginning Cash Position 930 930 1,404 178 420
CASH INFLOWS
DRAWDOWN - 4,661 4,355 3,345 2,809
CASHCON - 363 579 149 1,053
ROYALTIES - 14 14 14 14
PROPERTY SALES - - - 5,762 972
STOCK OPTIONS - 1 180 172 915
GIFTCARD - 17 42 (32) (19)
REFRANCHISING PROCEEDS - - - - -
STOCK OPTION PROCEEDS - 16 220 176 780
- 5,071 5,390 9,586 6,524
DisbursementsAP / PAYROLL / CAPEX - (3,682) (1,714) (1,968) (1,647)
401K CONTRIBUTIONS - - - - -
BANK FEES - - (134) - -
FX SETTLEMENT - - - - -
PENSION - - - - -
PROPERTY PURCHASE - - - - - INTERCO-LOANS / TRNSF - - - - -
STATE TAXES - - - - -
FED TAXES - - - - -
DIVIDEND - - - - -
MISCELLANEOUS - - - - -
SALESTAX - (123) (123) (123) (123)
PAYROLLTAX - (103) (0) (74) (207)
BENEFITS - (81) (84) (140) (47)
REPURCHASE ACTIVITY - (603) (604) (602) (493)
Total Disbursements - (4,592) (2,525) (2,907) (2,516)
LC FEES - - - - - DEBT ISSUE - - - - -
CREDIT AGREEMENT BORROWINGS - - - - -
CREDITAGREEMENT MATURITIES - - - - (10,000)
ADMIN FEES - - - - -
FACILITY FEES - - - - -
INTEREST - DAILY SWINGLINE - (11) (3) (2) (2)
INTEREST INCOME - ST INVESTMENTS - - - - -
SWAPS - - - - -
ON(BORROWING)/INVESTMENT - (16,028) (16,278) (14,431) (13,806)
- - - - -
Total Investing / Borrowing activity - (16,038) (16,280) (14,433) (23,808)
POSITION 930 (14,630) (12,012) (7,576) (19,381)
ON - Borrowing/(Investment) - 14,700 12,300 7,900 19,500
Est. Ending Balance 930 70 288 324 119
Total Swingline Borrowings - 14,700 12,300 7,900 19,500
Total Revolver Borrowings 35,800 35,800 35,800 35,800 32,400
Total Borrowings 35,800 50,500 48,100 43,700 51,900
Outstanding LC's 36,905 36,905 36,905 36,905 36,905
Total Credit Facility Usage 72,705 87,405 85,005 80,605 88,805
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Short Term Cash Flow Forecasting Communication / Reporting • Weekly Treasury Operations Meeting (Every Mon Morning)
– Discuss upcoming transactions (within next 1-2 weeks)
– Impact on Short Term forecast
– Participants – Treasury Ops, Int’l Treasury, Capital Markets
• Daily Cash Position distributed within Treasury to: – Asst Treasurer
– Forecasting and Planning
– Global Treasury Operations
• Weekly Position Report to Treasurer. Report shows: – Current position
– YTD and rolling 12-period change position
21
Short Term Cash Flow Forecasting Weekly Cash Position Report
$(300)
$(200)
$(100)
$-
$100
P12 '10 Q4 '10 P1 '11 P2 '11 Q1 '11 P4 '11
Revolver
ABR
Swingline
Investments
Domestic - Borrowing / Investment Balances In $ MMs
Domestic Credit Facility - % Utilization
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
P12
‘10
Q4
‘11
P1
‘11
P2
‘11
Q1
‘11
P4
‘11
Utilization - Including LCs
Utilization - Excluding LCs
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Medium/Long Term Cash Flow Forecasting
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Medium/Long Term Forecast Overview • Life blood of treasury strategies, used by treasury to
– Manage long term liquidity needs – Determine capital structure – Track/manage sensitivities
• Used by Treasury to review potential uses of cash
– Development – Dividends – Share Repurchase – Acquisitions
• Used for all external communications (Including communications to Wall Street)
• Used to understand geography of cash for repatriation & tax optimization – International BMU forecast builds up to division forecast
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Medium/Long Term Forecast High Level Process • Prepared & managed by treasury
• Quarterly forecast for the current year and out 3 years; updated quarterly or more often as needed
• Annual forecast up to 10 years;
updated annually
• GAAP format, prepared with input from key functions such as planning, tax, international units
• Includes forecast of all cash flow components, debt and cash balances
• Ensure syncs up to short-term consolidated cash flow forecast & bottom-up international BMU (business management unit) cash flow forecast
Current
US China YRI Forecast
Cash Flows - Operating Activities
EBIT (Op Profit before NFA) 573 296 423 1,291
Depreciation / Amortization 248 94 104 445
EBITDA 821 389 527 1,737
Interest (Inclusive of YGR) (141) 0 (13) (154)
Book Tax (127) (65) (91) (283)
Oper. Cash Flow 552 325 422 1,299
Capex (331) (169) (129) (629)
Acquisitions - (3) (25) (28)
Stock Option Proceeds, pre-tax 142 - - 142
Stock Option Tax Benefit 62 - - 62
Refranchising, pre-tax 229 1 26 257
Sale of PP&E 53 - 4 57
Free Cash Flow 708 154 299 1,160
Share Repurchase (983) - - (983)
Dividend (144) - - (144)
Cash Flow After Discretionary Spending (419) 154 299 34
Increase (Decrease) in debt 101 - 165 266
Permanent repat/Capital Infusion (15) - 15 -
Inter-company Loans 194 - (194) -
Final Free Cash Flow (138) 154 284 299
Beginning Cash & ST Inv. Balance 94 37 70 201
Change in Cash & ST Investments (138) 154 284 299
Ending Cash & ST Inv. Balance (44) 191 354 500
25
Medium/Long Term Forecast International BMU Forecast • Current year forecast for Int’l BMUs
only – Bottom-up approach – Quarterly updates
• Used to understand geography of
cash and determine appropriate strategies
• Hyperion pull of key cash flow accounts
• Discussions with field to review forecast and understand sensitivities
• Compare BMU build-up to top-down forecast to ensure alignment
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Medium/Long Term Forecast Quarterly Cash Flow Update Calls
• List of countries that we perform constant quarterly cash flow update calls with are the following:
– China - U.K.
– Australia - France
– India - Germany
– Thailand - Netherlands
– Singapore - Canada
– Korea - South Africa
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Medium/Long Term Forecast Communication/Reporting
• Cash Committee
– Includes CFO, treasurer and key finance executives – Meet quarterly to review cash flow forecast/sensitivities and
proposed uses of cash – Generally present medium/long term cash flow forecast
• Medium/long term Cash Flow Forecast
– Treasury, Tax, IR, Control & Planning teams – Distribute to CFO and his direct reports quarterly – Quarterly update to the BOD
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Medium/Long Term Forecast Reporting Example – Cash Committee
Total 2008A Total 2009A 2009 AOP
Plan
Difference
vs. Plan
Cause of Change
Beginning Cash Balance 789 216 216 (0)
Net Cash Provided by OP Activities b/4
Pension
1,587 1,681 1,579 102 Cash Tax & Interest Upsides
Contribution to Pension Plan (66) (280) (75) (205) Contribution to US Plan
Capital Spending & Key Money (939) (814) (900) 86 Capex Savings
Employee Stock Options Proceeds, Pretax 72 113 30 83
Refranchising Proceeds 266 193 250 (57) Delay/Remarket Deals
Acquisitions (35) (138) - (138) Acquisition Not in Original Plan
Sales of PP&E 72 34 50 (16)
Share Repurchases (1,628) - - -
Dividend (322) (362) (383) 21 +11% Q4 vs. Q2
Change of Debt 396 (315) (474) 159 Primarily New Bond
Other, Net (Investing/Financing) 25 24 50 (26)
Est. YE Cash Balance (B/S) 216 352 343 9
Est. YE Total Debt Balance (B/S) 3,589 3,266 3,120 146
29
Medium/Long Term Forecast Reporting Example – Sensitivities
Sensitivity
Amount
Upside (+)/Downside (-)
Probability
Operating Profit Task + $30MM
Medium
Capital Spending - $10MM Low
Cash Tax Payments - $10MM Medium
Change in Working Capital +/- $10MM
30
Cash Flow Forecasting
Summary
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Cash Flow Forecasting Challenges & Solutions • Difficulties in predicting certain cash
flows – Working capital flows – Cash taxes
• Timely communication/alignment with
various areas – International Markets – Domestic brands – Various functions such as M&A, Tax,
Control, Development, etc.
• Changes in external factors
– Interest rate (Impact borrowing cost and investment income)
– Foreign exchange
• Complexity of international cash flow
• Unanticipated change in the business • Manual processes/human error
• Evaluating new working capital model to drive better results
• Seek senior management focus & support
• Proactively evaluate sensitivities ongoing • Scenario analysis
• Dedicated resources
• Hold contingencies
• Frequent cross-check & reconciliation • Automated system
32
Cash Flow Forecast How do we measure success
• Currently, forecast accuracy based upon:
– Meeting operating cash flow targets
– Managing discretionary spending to forecasted levels
– Maintaining forecasted debt levels
– Ensuring appropriate year-end cash levels
– Managing changes/sensitivities & communicating in a timely fashion (Will probably never be 100% accurate)
33
Cash Flow Forecast Learnings
• Senior management support is critical – Communicate regularly (Cash Committee)
• Forecasting is a dynamic process, manage/communicate
sensitivities & assumptions
• Reconciliation with other areas/forecasts is critical
• Looking at a consolidated position is not enough, you need to know where the cash is
• History repeats itself (usually)
• Know the impact of book vs. cash flows
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Cash Flow Forecasting
Q&A
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