optimizing your cash forecast
TRANSCRIPT
© 2015 Treasury Strategies, Inc. All rights reserved.
Presented By
Optimizing Your Cash Forecast: Improving the Crystal Ball
December 9, 2015
Jeff DiorioTreasury StrategiesManaging Director
Elaine FilusTreasury StrategiesPrincipal
Bob StarkKyribaVice President, Strategy
Welcome!
Jeff DiorioTreasury Strategies, Inc.Managing [email protected]
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Elaine FilusTreasury Strategies, [email protected]
Bob StarkKyribaVice President, [email protected]
@treasurybob
Agenda
• Why is Cash Forecasting So Difficult?
• Forecasting Fundamentals
• Liquidity Forecasting: Overview
• Liquidity Forecasting: The Details
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Why is it so difficult?
65%59%
47%
35% 34%31% 30%
What are your top 3 strategic challenges?
Source: TSI/Reval Treasury Benchmarking survey, 2015.
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Polling Question 1
Ø How would you rate your current forecasting process?• 5 = Excellent
• 1 = Poor
• 0 = What forecasting process?
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Challenges
• A majority of organizations have ineffective cash forecasting processes.
• Many organizations face the same kinds of forecasting challenges:- Insufficient resources
- Poor information access/exchange
- GIGO (accurate data sources)
- Organizational complexity
- Ineffective forecast methodology, tools
- Poor internal knowledge of cash flows
- Inconsistency between short-term cash forecast and budget
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Polling Question 2
Ø Which 2 of the following are your toughest challenges? (select 2)
• Insufficient resources
• Poor information access/exchange
• GIGO (inaccurate data from sources)
• Organizational complexity
• Ineffective forecast methodology, tools
• Poor internal knowledge of cash flows
• Inconsistency between short-term cash forecast and budget
• Other
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Benefits
• Avoid liquidity and capital issues
• Maximize the value of cash assets- Minimize the cost of borrowing à Lower cost of capital
- Maximize return on investments
• Enhance control (anomalies quickly recognized)
• Improve the effectiveness of risk management activities
• Improve the comfort level of key stakeholders
• Improve the financial performance of the company
• Support Treasurer’s contribution to business planning
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Forecasting Fundamentals
High-level blueprint of the company’s financial future
Forecasting Objectives
• Ensure access to adequate capital – cash and credit- Short-term à Liquidity planning [Treasury]- Long-term à Capital planning [FP&A]
• Ensure effective working capital management: Is cash effectively deployed?
• Effectively manage risk: where are we exposed (FX, interest rate)?
• Design a capital structure that supports business plan
• Anticipate impact on earnings, profits, EPS
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Capital Budget vs. Liquidity Forecast
Business Strategy
Capital Structure
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Capital Budget vs. Liquidity Forecast
Business Strategy
Capital Structure
Liquidity Forecast
Budget
Budget
Top-down (FP&A) vs. bottom-up (Treasury) approach to liquidity
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Reconciling: Budget vs. Liquidity
• Reconciling budget cash with liquidity cash is difficult – there are differences
Budget
Pro Forma Financials
GAAP Accounting
Ledger Balances
Long-Term (1–5 yrs)
Periodic Updates
Liquidity
Manage Liquidity
Actual Cash
Available Balances
Less than 1 year
Frequent Updates
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Reconciling: Budget vs. Liquidity
• Reconciling budget cash with liquidity cash is difficult – there are differences
Budget
Pro Forma Financials
GAAP Accounting
Ledger Balances
Long-Term (1–5 yrs)
Periodic Updates
Liquidity
Manage Liquidity
Actual Cash
Available Balances
Less than 1 year
Frequent Updates
• Different goals
• Different perspective
• Different measure of cash
• Different time horizon
• Different schedule
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Liquidity Forecasting: Overview
Purpose of Liquidity Forecast
• Guide funding operations: Do we have adequate cash?- Mobilize cash- Drawdown/repay credit, purchase/redeem invested funds
• Manage intercompany balances: Is cash effectively deployed?
• Ensure cash optimization: Maximize return? Minimize funding expense?- Define investment maturity to maximize return- Decisions about borrowing – which funding source, for how long?
• Inform risk management: Measure and effectively hedge foreign exchange and interest rate exposures
• Plan non-discretionary payments: Can we meet the requirements of our creditors and support the strategic business plan?- P&I repayments- Taxes, Payroll- Acquisitions
Support key treasury activities
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Treasury Forecasts
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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
Liquidity Forecasting: The Details
Liquidity Forecasting Cycle
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CentralizedCollection Tool Forecasting
ModelVariance 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
What you need...
• Comprehensive mapping of all cash flows and strong understanding of cash flow volatility drivers
• Strong communication with providers of information- Communicate the importance of accurate cash flow information- Train business units in cash forecasting best practices- Provide feedback on accuracy- Enforcement
• Tools that support data gathering and consolidation
• Dynamic trending and variance analysis tools linked to the TMS- Information from the TMS is used to generate forecasts, then forecasts are, in
turn, fed back in to the TMS
- Or, tools are resident in the application
• Accurate assessment of the level of aggressiveness/conservativeness - Evaluate the consequences of inaccuracy
- Review actions taken based on forecast
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Sources of Data: Liquidity Forecasts
Bank Transactionsand Balances
(Bank Portals)
LiquidityForecast
Business Unit Forecasts
(Subsidiaries/Affiliates)
Sales Forecast(Sales Department)
A/R & A/P(ERP & A/R, A/P
Systems)
Investment & Debt Maturities
(Treasury)
Interest Flows(ERP & Treasury)
Capital Expenditures
(Business Planning)
FX & Derivative Settlements
(ERP & Treasury)
Repetitive Payments(Various Sources: Tax,
Payroll, Insurance, Accounting, Finance)
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Approaches to Forecasting
• Receipts and Disbursements
- Specific known upcoming cash flows - Generated by TMS- Reported by sources
- Recurring items
- Apply trending, seasonality to historical data
• Statistical Modeling
- Time series, regression, other complex techniques
- Determine business variables that correlate with cash
- Identify sources of business variable data
- Select statistical methodology/tools and develop forecast
- Test model for significance
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Defining Methodologies
Type of Cash Flow Forecasting MethodologyReceipts Accounts Receivable short-term; Sales estimates longer-term
AP Disbursements Accounts Payable short-term; Expense estimates longer-term
Payroll and Benefits Bi-weekly estimates based on history + info from HR
Debt-Related Expense Based on principal, interest, and fee information in the TMS
Taxes Planned payments and estimates from Tax department
Capital Expenditures Schedule of CapEx-related payments from Finance
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• One size does not fit all
• Consider forecasting methodology at a granular level – individual cash flows
End Result
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7/14/14 7/15/14 7/16/14 7/17/14 7/18/14 7/21/14 7/22/14Mon 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)
Ending1Balance
CP=Outstanding
All#balances#are#in#MM
Netting=Payments/ReceiptsTreasury=WiresIC=Payments/Receipts=
Borrowing1ActivityCP=MaturingCP=Issuance
Expected=Payroll
Domestic1Cash1Forecast
Beginning1Balance1(MMF)
Cash1ActivityExpected=ReceivablesExpected=Payables
Variance Analysis: What was different?
1. 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 sources4. Update the forecast5. Rinse and repeat
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Reporting: Meet Stakeholder’s Needs
• Highlight material variances and provide explanation
• Reporting uses indicate required views of the data
- Manage deployment of cash excesses à view by bank account
- Plan for intercompany lending à view by entity
- Manage FX hedging à view by currency
- Manage quarter-end financials à view by specific time buckets
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Other Analytics
• What-if/scenario analysis
- Changes in market conditions à impact on sales, supplies, inventory
- Changes in interest rates à impact on cost of debt
- Changes in FX rates à impact on exposures
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To Summarize...
• Strong liquidity forecasting is a key component of financial success
• Treasurer’s role...
- Facilitate effective communication
- Ensure sound forecasting processes
- Provide supporting resources and tools
• Liquidity and capital budgeting forecasts may have different objectives, but can benefit from common practices
• Variance analysis should foster continuous improvement
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Success Factors
• Endorsement by senior management
• Clearly define objectives and goals – relevant to all stakeholders
• Develop communication channels between Treasury and data “owners”
- Efficient, systematic data flows
- Clear roles and responsibilities
• Create efficient, consistent methodologies
• Keep it simple – balance precision with effectiveness
• Regular variance analysis for continuous improvement
• Collaborate with FP&A
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Thank You!
Jeff DiorioTreasury Strategies, Inc.Managing [email protected]
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Elaine FilusTreasury Strategies, [email protected]
Bob StarkKyribaVice President, [email protected]
@treasurybob
Find this presentation and others atOur website www.treasurystrategies.comOur YouTube Channel https://www.youtube.com/c/treasurystrategiesincconsulting
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About Treasury Strategies, Inc.
Who We AreTreasury Strategies, Inc. is the leading treasury consulting firm working with corporations and financial services providers. Our experience and thought leadership in treasury management, working capital management, liquidity and payments, combined with our comprehensive view of the market, rewards you with a unique perspective, unparalleled insights and actionable solutions.
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About Kyriba
Who We AreKyriba is the global leader in cloud Proactive Treasury Management. CFOs, treasurers and finance leaders rely on Kyriba to optimize their cash, manage their risk, and work their capital. Our award-winning, secure, and scalable SaaS treasury, bank connectivity, risk management and supply chain finance solutions enable some of the world’s largest and most respected organizations to drive corporate growth, obtain critical financial insights, minimize fraud, and ensure compliance.
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