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TMI | Issue 212 11

T here is great potential for corporations to increasefinancial performance by optimising their cash flowforecasting. Analysis within our client community

highlights that through the implementation of best practices,organisations know exactly where their cash is, are able tooptimise their cash, and can manage liquidity risk moreeffectively. Specialised technology helps corporates to leveragesignificant efficiency gains. Manual tasks in the collection ofdata and in reporting are reduced through highly automatedprocesses, and corporations achieve true global visibility of theircash and forecasting objectives.

Why focus on cash flow forecasting?

During the financial crisis, corporations learned, some the hardway, the value of placing more emphasis on effective cash andliquidity management. In times when the banks becameincreasingly restrictive in their lending policies in providing cash tocorporations for smoothing any gaps in their cash flow curve orfor investing in business development, corporations instead had toturn to their own resources and eke out every free penny. In orderto mobilise their own resources, corporations need to have reliabledata representing their actual and expected cash position. Thus, ifcompanies achieve greater efficiency in their accounts receivableand payable processing, they are laying a solid foundation for astrategic liquidity management structure: the more clearly theyknow where their cash is and what their cash requirements areover a certain period of time, the better they can steer theircorporate ship through otherwise murky waters. Without efficient cash flow forecasting, companies cannot

analyse, track, and manage risk exposures that continuouslychallenge treasury. Maintaining optimal levels of liquidity is crucialfor ensuring the continued success of a corporation. If companieshave too much unused cash lying around in bank accounts or even

in corporate in-house accounts, they will lose out on interestearnings and may even have to pay interest fees for externalcapital. If, however, corporations continuously operate under theirminimum liquidity requisites, the consequences are worse and theyrisk bankruptcy or foreclosure.

The benefits

Securing corporate liquidity Although not all corporations can be measured by the samemeans, it can be said that companies with a solid liquidity reserveare in a stronger position to get through financial demands thanthose without sufficient reserves. Having suitable cash in theappropriate currency to meet obligations at all times is one of thekey strategic aims of a corporation to secure sufficient liquidity inorder to safeguard business operational demands. An efficient andcompany-wide cash and liquidity management is crucial inachieving this objective.

Optimising working capital managementEffective cash and liquidity management is again at the top of thecorporate agenda. Corporations had to revert to their own internalresources to get through the crisis. Tracking and optimisinginternal resources continues to prove to be a successful initiativein reducing the dependency on external funding and countermarket challenges. The first key priority is to understand clearlyhow much liquidity a company has across all accounts, globally;this baseline will determine optimisation potential for using cashmore effectively and streamlining internal processes. As a result,working capital will be optimised: deficient accounts of onecorporate subsidiary can be offset with the surpluses of anothersubsidiary, and surpluses can be invested – not just in short-termsolutions but also in more strategic long-term solutions. Byoptimising overall working capital management, corporations will

by Mary Ann Rydel, Director of Product and Consumer Support, Hanse Orga International Corp.

Efficient Cash Flow Forecasting– a Best-Practice Guide

If companies

achieve

greater

efficiency in

their

accounts

receivable

and payable

processing,

they are

laying a solid

foundation

for a

strategic

liquidity

management

structure.

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12 TMI | Issue 212

also achieve the second key target ofefficient cash flow forecasting: reducingthe costs that are related to retaininghigh(er) levels of liquidity.

Getting the optimal level of liquidityrightKeeping the balance between too tight ortoo high levels of idle cash is one of thekey challenges of liquidity management. Acash reserve is always necessary to coverthe company’s overheads, to meet creditrating requirements, and to provide abuffer for investments as well as anyunforeseen events. While it is a prettystraightforward matter to measure theliquidity requirements for purchases,overheads and credit ratings, it is morecomplex to plan liquidity requirements.Events such as unexpected marketdynamics, natural disasters or politicalinstability are highly uncertain variableswhich are highly difficult to predict.However, a cash-flow based liquidity plancould incorporate many of theseuncertainties, even the unpredictable

events, by leveraging best, worst andaverage case scenarios.

Improving credit ratings In addition to mobilising its own resources,efficient cash flow forecasting also helpsto strengthen the credit rating of acorporation. After the liquidity crisis andin the light of Basel III, banks have startedto request more information fromcorporates applying for credit such astransparent cash flow analyses. Theseanalyses are one of the key indicatorsdemonstrating the financial health of acompany and its ability to meet theirobligations and to cope with unforeseenevents. Therefore, cash flow forecastingincreasingly influences the externalfinancing alternatives available tocorporations.

The corporate situationtoday

All the more surprising is the stillwidespread use of Excel for managing

liquidity. Sure, it is easy to use, but it doesnot offer corporations the flexibility andefficiency to quickly anticipate and reactto new challenges and the ever changingexternal factors and influences. Moreover,the often manual data collection in Exceland the generation of worksheets fromthe data is not only risk prone but alsovery time-consuming. Instead of focusingon analysis and reports to support thestrategic decision making of corporatemanagement, treasurers and cashmanagers are burdened with laboriousand manual tasks. The more complex andglobal the structure of the corporation,the greater the efforts are for the centraltreasury to collect and merge all datacorrectly and quickly. Due to the diversestructures and applications, corporategovernance, local regulations andreporting requirements, treasurers arefaced with significant challenges. How much could be gained with a

professional solution for cash andliquidity management that automaticallyretrieves the relevant data from multiple

Cash flow

forecasting

increasingly

influences

the external

financing

alternatives

available to

corporations.

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TMI | Issue 212 13

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divisions and applications is clearlyreflected in the experience of our HanseOrga customers. As stated by one, “OurTreasury Analysts now have their liquiditydata available first thing each morning.We have already achieved an automaticassignment rate in our forecasting of99.975%. Further, as a result ofautomating our processes, we also havesignificantly increased our capacity totrack over 300 plan groups and are, thus,able to conduct variance analyses at amore detailed level.” Corporations increasingly recognise the

potential of professional solutions, andtrends show that treasuries are placinggreater emphasis on efficient cash flowforecasting and are increasingly investingin professional solutions to obtain aclearer picture of company-wideresources.

Solutions

Benefits of specialised technology The change is here. By deployingspecialised technology, which ideally isfully embedded in a centralised ERPsystem, for example SAP, corporationshave the inside track when it comes toefficient cash flow forecasting. With anintegrated solution, all balances of thecompany’s subsidiaries are automatically,without any risk-prone interfaces,incorporated into a single cohesive view.Indifferent of the types of systems,languages, currencies, or local conditions,the subsidiaries’ data is taken intoaccount and seamlessly combined toenable global visibility. Automatedprocesses reduce the time-consumingmanual transfer of data from one sourceto the other and ensure reliability ofdata. International corporations benefitfrom time-saving, automated technologythat enables a comprehensive andcompany-wide overview in real time. The actual financial situation of a

corporation becomes visibly manageable,and cash flow forecasting is based onsolid data instead of best guesses. Thisdrives efficiency gains and allows for areliable performance analysis of thecorporation’s subsidiaries, businessoperations, products, and othermanagement elements.

Checklist for selecting specialised cashforecasting solutionsA professional solution for cash flow

forecasting should provide intelligentfeatures that afford corporations thefollowing benefits:

� SAP integration and inclusion of non-SAP systems: An ideal solution shouldprovide full integration within thecentral SAP ecosystem, and as such,with much of the data for cashforecasting coming from non-SAPsystems, the solution should be flexibleto enable automated data retrieval fromthese multiple external systems andaccommodate manual entry.

� Cash flow-based planning: It is not justthe accounting data that forms thebasis for short-term forecasting;instead, the planning is based on themore up-to-date actual cashmovements. The system should assist inthe determination of value-datedclearings and settlements for true cashmovement.

� Rolling liquidity planning: Rollingliquidity planning helps treasurers adaptplans rapidly whenever the need arises.Instead of revisiting the yearly budgetsand comparing actual costs with theforecasted at the end of a year,treasurers can have a continuouslyupdated liquidity plan immediatelyavailable, reporting that is easilyaccomplished with a click of the mouse,and the level of granularity that can beflexibly defined.

� Central and global visibility: With anintegrated approach, the treasurer willbe able to have all relevant dataavailable in worksheets that provide aclear view of all domestic and globalpositions, multicurrency and basecurrency views, and that enable thedrill-down into individual summaries forfurther details.

� Time savings: The solution shouldreplace Excel, and the many manualtasks involved, with a highly automatedprocess to retrieve, assign, analyse,archive and track the changes of dataand planning scenarios.

� Optimised interest revenue: Returnscan be increased by consolidating fundsto determine surplus cash usage in theform of short- versus long-terminvestments, pay down of borrowings orshareholder disbursements.

� Analysis, reporting and compliance:Different reports and analyses arerequired to appease multiplestakeholders and regulations, both

internal and external, including localand central management, auditors, taxregulations, external investors andcustomers. The level of granularity andthe time horizon of cash forecasts varywith the specific requirements of eachstakeholder. The solution should providea flexible selection of the necessary dataelements to produce requireddocumentation.

� Simulations of scenarios: Withfunctions that enable flexible modellingand evaluation of different scenarios(best case, worst case) of current andhistorical data, corporations will have anideal tool to anticipate, for example, theeffects of external events, acquisitionsetc. This is important when assessingdata and establishing longer-termforecast projections.

Conclusion

If corporations want to leverage bestpractices, it is imperative to maintainefficient and effective cash flowforecasting. A central and real-timeoverview of company-wide cash positionsforms the basis for accurate strategicdecisions, and internal as well as externalresources can be mobilised more easily.Next generation ERP-integrated softwaresolutions automate manual tasks andensure optimal levels of liquidity andprovide transparent and compliant data tomeet the directives and objectives set bymanagement. �

Automated

processes

reduce the

time-

consuming

manual

transfer of

data

from one

source to

the other

and ensure

reliability of

data.

Mary Ann RydelDirector of Product andConsumer Support, Hanse Orga InternationalCorp.

Mary Ann Rydel is Director ofProduct and Customer Support forHanse Orga International Corp., the subsidiary of theGerman financial software specialist Hanse Orga AG.Mary Ann has more than 25 years of experience intreasury and cash management solutions for corporationsand financial institutions. Before joining Hanse Orga inJanuary 2012, she worked for GTreasury SS, LLCoverseeing the company’s product direction andsupervising client implementation and optimisationprojects for cash, liquidity, and payments; and previouslywith ABN-Amro/La Salle Bank, managing variousoperational units such as Wire Transfer, ACH, andLockbox.

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