leaping the barriers to perfect cash forecating

Jeff Diorio | Director| Treasury StrategiesBob Stark | Vice President, Strategy | Kyriba

February 16th, 2017

© 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 2

Jeff Diorio

Director

Treasury [email protected]

Today’s speakers

Bob StarkVP, Strategy

Kyriba [email protected]

@treasurybob

mailto:[email protected]



Today’s Discussion

1) Forecasting challenges

2) Why forecasting needs to be a priority

3) Overcoming barriers to forecasting

– Spreadsheets are easy

– Identifying the right approach

– Direct vs. indirect methods

– Assessing forecast accuracy

Forecasting Challenges


Importance of forecasting to companies?

Source: Treasury Strategies 2017 State of the Treasury Profession survey.

Rank2017

Rank 2016

Rank 2015

Cash forecasting

Financial risk management, FX

Treasury staffing levels and skill sets

Treasury functional organization

Treasury management systems

1

2

3

4

5

1

2

8

3

6

1

2

3

5

7

Bank relationship management

Best practices

Operational efficiency

Balance sheet optimization

Bank service fees

6

7

8

9

10

4

5

10

9

-

6

4

9

11

-


A majority of organizations indicate they have ineffective cash forecasting processes

Many organizations face the same kinds of forecasting challenges:

Why are there barriers to overcome?

Insufficient resources Ineffective forecast methodology, tools

Poor information access/exchange Poor internal knowledge of cash flows

GIGO (accurate data sources) Low priority by senior management

Organizational complexity Inconsistency between short-term cash forecast and budget

Why forecasting needs to be a priority


1) Avoids liquidity and capital issues

2) Maximizes the value of cash

3) Improves the effectiveness of risk management

4) Returns value to stakeholders

5) Improves the financial performance of the company

6) Supports Treasurer’s contribution to strategic planning

Forecasting is a priority because…


Increased Investment

By improving forecast accuracy, CFOs are able to reduce idle or underinvested cash balances and increase returns on cash

For every $10M of idle cash freed for strategic investment, bottom line impact can be > $100,000/year

Centralizing cash through In-House Banking / Cash Pooling will uncover more idle cash (and increase mobility back to subsidiary entities)

Why Forecast – Increasing Investment Income


Reduced Borrowing

Many organizations maintain idle balances but also have short term and/or long term debt outstanding

Without a reliable cash forecast, Treasurers hesitant to commit to debt repayment (save for a rainy day)

Typically revolver is first to be paid down (more flexibility) but lately some treasurers don’t want to lose availability so will pay down outstanding bonds instead

Why Forecast – Debt Repayment/Reduction


Hedge Effectiveness

A better forecast means a better hedge program

For a $1B distributor with 50% global revenues, a 1%↑ in USD means $500M of global revenue becomes $495M

Increasing hedge coverage from 50% to 75% protects $1.25M for every 1% ↑ in USD

Why Forecast – Improving FX Hedging Effectiveness


Why Forecast – Excess Cash Balances

Shareholders want value from free cash flow & excess cash balances

Shareholders have visibility into your balance sheet and cash flow statement

Shareholders demanding return on cash –or return of cash

Complete visibility => confidence to make future decisions regarding excess cash (regardless of location or currency)

13© 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 13

Why Forecast – Excess Cash Balances

Repatriating cash from overseas

Upcoming tax holiday is widely expected

A good forecast will confirm where/when cash is needed in overseas markets so that repatriated cash is maximized

Without a reliable forecast:

Lost value

Increased scrutiny by shareholders


Working Capital Improvement

Improved visibility into cash flow needs and supplier payment terms identifies value of extending DPO

Determines ROI of a supply chain finance program

Sample scenario: – $1B annual supplier spend– Term extension of 30 days– Annual free cash flow gain of $83M– Income of $50,000

Why Forecast – Working Capital Improvement


Today’s Discussion

1) Forecasting challenges

2) Why forecasting needs to be a priority

3) Overcoming barriers to forecasting

– Spreadsheets are easy

– Identifying the right approach

– Direct vs. indirect methods

– Assessing forecast accuracy

Spreadsheets


Spreadsheets are easy…when your forecast is easy

Become less effective when integrating data sources

Not truly multi-user– Lack controls– Lack audit trails

Can’t store multiple versions – e.g. variance analysis

Poor business continuity

Limitations of spreadsheets

7/14/14 7/15/14 7/16/14 7/17/14 7/18/14 7/21/14 7/22/14

Mon Tue Wed Thu Fri Mon Tue

582.00 598.49 1037.44 1283.22 554.96 515.13 536.16

46.49 104.95 0.78 2.74 0.17 51.03 165.33

(30.00) (30.00) (30.00) (30.00) (30.00) (30.00) (30.00)

(50.00) (10.00)

(651.00)

(11.00) (100.00)

(125.00) (125.00)

500.00 500.00

598.49 1037.44 1283.22 554.96 515.13 536.16 671.49

(250.00) (625.00) (1000.00) (1000.00) (1000.00) (1000.00) (1000.00)

EndingBalance

CPOutstanding

AllbalancesareinMM

NettingPayments/Receipts

TreasuryWires

ICPayments/Receipts

BorrowingActivity

CPMaturing

CPIssuance

ExpectedPayroll

DomesticCashForecast

BeginningBalance(MMF)

CashActivity

ExpectedReceivables

ExpectedPayables

Approaches to Forecasting


Treasury Forecasts

They should be linked, but all have different objectives and uses

Near-Term Medium-Term Long-Term

Objectives Daily cash positioningInvest/borrow decisions

Liquidity planning, borrowing decisions

Long-term capital management and earnings protection

Horizon 1–4 weeks 13–18 weeks 12–18 months

Detail Most granular, account level details

Medium Summary level detail; focus on balance sheet, business categories

Frequency Daily Weekly Monthly or Quarterly

Update Intraday, as needed Weekly Monthly

Treasury can have multiple forecasts – different time horizons


Capital Budget vs. Liquidity Forecast

Business Strategy

Capital Structure

Liquidity Forecast

Budget

Budget

Indirect/top-down (FP&A) vs. direct/bottom-up (Treasury) approach to liquidity


Reconciling budget cash with liquidity cash is difficult

There are differences

Reconciling: Budget vs. Liquidity

Budget

Pro Forma Financials

GAAP Accounting

Ledger Balances

Long Term (1–5 yrs.)

Periodic Updates

Liquidity

Liquidity Management

Actual Cash

Available Balances

Less Than 1 Year

Frequent Updates

Different goals

Different perspective

Different measure of cash

Different time horizon

Different schedule

Building the Forecast


Two distinct approaches

1) Direct (build from data)– Specific known upcoming cash flows – Estimate from history

2) Indirect (top down)– FP&A approach

Determine the Forecasting Approach


Find the right data sources

Bank Reporting

CashForecast

Business Units

Spreadsheet Models

ERP

Investments and Debt

Historical Data

Internal TeamsDerivative Positions Payments

Effective forecasting

Choosing the right sources and models

for the different forecasting line items


Importing cash flows doesn’t need to be an IT exercise– System should take any format and ‘file structure’ without IT help

– Want to import detailed numbers and/or import sum totals and spread across days

– Accommodate versioning of forecasts

Importing Cash Flows


Repetitive cash flows can be modeled for any frequency, with variability by day, week, month– Best used to create a placeholder– Later replaced with more updated forecast data from other

sources

Recurring Cash Flows


*Visibility*

Typical Workflow

1) Decide action and adjustments (e.g. average or trending of historic flows)

2) Select historic cash flows to extrapolate forward (dates and filtered query)

3) Determine date/periods to project forward

Extrapolation of Data


• Building scenarios upon existing forecasts

– Changes in market conditions impacts sales, supplies, inventory

– Changes in interest rates impact on cost of debt

– Changes in FX rates impact on exposures

What-if / Scenario Analysis

Assessing Forecast Accuracy


1) Perform variance analysis• Forecast to Actual• Forecast to Forecast• Multiple frequencies

2) Analyze forecast effectiveness• By line item

• By time period

3) Report back to data sources or review

4) Update the forecast with improved data

5) Rinse and repeat

Forecast Accuracy – Ongoing Variance Analysis


Require detailed variance analysis to find the discrepancies Need multiple time snapshots – quarterly assessment insufficient Data visualization can be easier to target problems

Forecast Accuracy – Analyze forecast effectiveness


Building the Forecast: Putting it all Together

CentralizedCollection Tool

Forecasting Model

Variance Analysis

Output Reports to Users

Forecast Refinement Process

Data Sources

Business Units

Financial Units

Internal Systems

Bank Data

1. Data Gathering

2. Execution

3. Variance Analysis

& Analytics

4. Reporting

5. Refinement

In Summary…


Cash Forecasting – Conclusions

Creating the cash forecast. Understand the objectives and benefits before rolling out cash

flow forecast exercise. Flexibility to align your data, the accuracy of the inputs will determine

the best methods to build your forecast effectively

Many reasons to forecast: Meeting the objectives of management and shareholders is

critical. Cash Forecasting is important if you are “cash rich”. Multinationals with significant

foreign revenues must forecast better in order to hedge effectively.

Measuring the forecast is the most important part of forecasting. Without measuring forecast

accuracy, it is impossible to know if you are good at forecasting.

ROI of cash forecasting is very high. Can be measured by investing longer with higher

returns on cash, repaying debt, earning yield from early supplier payments, and the value of

foreign cash protected through effective hedging


– Comprehensive mapping of all cash flows and strong understanding of cash flow volatility drivers

– Strong communication with providers of information

– Tools that support data gathering, modeling and consolidation

– Dynamic trending and variance analysis tools

– Accurate assessment of aggressiveness/conservativeness level

Evaluate the consequences of inaccuracy.

Review actions taken based on forecast.

Cash Forecasting – Final Thoughts

Questions?

Bob [email protected]

@treasurybob

Jeff [email protected]



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leaping the barriers to perfect cash forecating

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