C-FAB!Cash Forecasting and Budgeting

Presented toNACM Western Region Credit Conference

October 6, 2011

AgendaBudgeting versus Forecasting versus Planning

Defining the Planning Cycle

The Role of Data Management

Methods and Methodologies

Two Case Studies

Managing Variances

Forecast Killers

Planning Checklist

Budgeting, Forecasting, and Planning

Budgeting What they assume/want to happen

Forecasting What you expect to happen

Planning How you respond to each

Key Questions:

Which comes first (ordinal)?

Which is the most critical (make-or-break)?

Which do you perform in your organization?

Hint: These are trick questions

The Textbook Planning Cycle

Strategy

Plan

Budget

Forecast

Assessment

WITHIN THE CONTEXT OF A MISSION & OBJECTIVE:

The Reality Planning Cycle

New News

ReactionResults

Impact on Credit/CollectionsPriority has been placed on reacting over planningVery little time to react or plan (especially plan)Good reactions may not yield good long-term resultsIt’s unfortunate, but reality planning may be permanentThesis of this presentation:

Cash Planning is irrelevantSuperior Cash Planning = discipline and flexibility

Elements of Successful Planning

ALIGNMENT

DATA

REFINEMENT

ANALYSIS

No Surprises

Database ManagementThe cornerstone of successful planningLowest cost piece of information out there—YOU

ALREADY HAVE ITFact-basedCan help you manage your own expectationsFirst level of managing expectationsShould include all details of the cash process:

Dates of every step: invoice, receipt, application

Invoice InfoPayment Type

Methods and MethodologiesDSODays to RemittanceDays to ReceiptBilling TypeCustomer TypeCustomer LocationProductSales ProgramRisk ProfileCustomer-by-customer

Which Approach is Right For You?

Start with applying all methods to

historical data

Determine correlations--This is your

methodology

Share your results and obtain alignment

Case Study 1—ManufacturerSells to distributors and directly to customersMultinational1,600 customersNew models every yearNo seasonalityCountercyclical ProductQuestions:

What more information do you need?How would you plan for the upcoming year?

Case Study 1—PlanningReceipts Database :

Yr Mo. Day

Cust

Day of Wk.

Cust Type

Prod

Prod Yr

Loc Sales Prog

Risk

Inv Amt

Pmt Amt

Inv. Date

% Pd

Planning Reports :DTP by Product TypeDTP by Prod YrDTP by Sales ProgDTP by Risk (assumes risk correlates to economic

cycle)DTP by customer type/Loc./Prod. Yr./Sales Prog

1. Define correlations2. Calibrate to the sales forecast

Case Study 2—Service ProviderSells directly to business customers3,000 customers2-year contracts—upfront and monthly

chargesRapid GrowthHighly Competitive BusinessQuestions:

What more information do you need?How would you plan for the upcoming year?

Case Study 2—PlanningDatabase :

Yr Mo. Day

Cust

Item Billed

Sales Prog

Risk

Inv Amt

Pmt Amt

Inv Date

% Pd

Cust. Since

Planning Reports :DTP by Item Billed (upfront versus service)DTP by Cust. Since% Pd by Item Billed% Pd by Cust. SinceDTP by Risk (assumes risk based on payment

history)

1. Define Correlations2. Calibrate to Sales based on Customer Profile

Managing VariancesKey Point: You are planning and not predicting

Requires separate database of accuracy/variances

Variances should be calculated in as much detail as forecast

Historical variance levels should be used to set a RANGE of expectations e.g., % of receipts/forecast

Other Key Point: TELL SOMEBODY!

Forecast KillersRelying on a single methodology

Absence of data granularity

Not analyzing your own data

No visibility into customer-affecting changes

Not asking for information that you need

Telling people what they want to hear/Accepting their assumptions

Concluding PointsThe objective is to manage expectations as well as manage

to expectations

Successful planning=consistency with expectations

This requires a LOT of data accumulation and analysis

This requires constant review, revision, and communication—over time, should yield a tight range

Doing this brings you into the realm of a reliable, professional planner

Maintain discipline through a checklist

Planning ChecklistDo I have a usable database?Do I have reasonable data conclusions?Is Management aware of the data conclusions?Do my expectations agree with the data conclusions?Does Management agree with the data conclusions?Do I have a range of expectations?Does my range contain Management expectations?Do I have a reporting/assessment plan?Have I identified all possible variance influences?Do I have a plan to report/respond to variance?