Cover Story : Fast Forward

In the world of cash forecasting, change is accelerating as more and more companies look to improve forecasting in order to better manage liquidity.

When Global Finance launched 20 years ago, cash forecasting was in its infancy. There was little beyond a spreadsheet to aid in the process, and forecasts were solely for local operations. Today there are some extraordinarily sophisticated systems available to help bring together information from across the globe, and forecasting can be done with relative accuracy out further than ever before.

While some skeptics remain, companies have increasingly focused on getting accurate views of cash across their organizations and using forecasts to improve management of that liquidity. And with good reason: No company wants to find itself with inadequate cash in hand to meet trading commitments and obligations. Over the past few years trade has changed significantly, with more low-cost sources of manufacturing appearing, new markets emerging and the development of more global trading than ever before. All of this demands more sophisticated cash forecasting systems, focus and processes, and many vendors, banks and treasury management system suppliers are building out their forecasting functionality to fill this niche.

Tuija Sipil, the director of the solutions unit at Finnish vendor OpusCapita, says that the world of cash forecasting is barely recognizable from where it was two decades ago. It has certainly changed quite a lot since then, she notes. Basically we worked with a spreadsheet, and a floppy disk was sent by ordinary mail once a month from our subsidiaries. Then we would try to upload it and consolidate data by spreadsheet. Naturally the information wasnt always correct, there was a lot of human error, and a lot of time was spent calling companies and trying to fix that, she says. It could take a week or two to have consolidation. In the worst cases it took a whole month to consolidate, and then we had to start all over again. It was a huge manual job to do it.

All this work was simply to do a local forecast; there was no international consolidation, no email and no Internet. Also it was a different world then because there were so many more currencies in Europe and, of course, so many more bank accounts, as well, says Sipil.

Today, companies have the ability to do a reliable regional and global forecast in a relatively short timeframe. The huge change is really about the technology. We have advanced systems that can provide the backbone needed, says Sipil. And with email, Internet and company intranets, it is easy to share information. Banks can now provide balances and account information electronically so data can be collected while assuring that it will not be changed during the forecasting process.

The big problem today is not the technology, but rather that most companies still have the incorrect assumption that it is not possible within their own organization to do effective cash forecastingto collect information from all the different sources and do the integration, says Sipil. She explains that the difficult part is to decide what you want to do, to define what forecasting means to your company and to change your processes so that you can do it. Computers and technology cant make information better, so you have to really know why you do a cash forecast and what it will mean for you, she says.

However, not everyone agrees that forecasting is so critical for all companies. Efficiency improvements in the short-term debt and investment markets have made investing and borrowing easier, thus reducing the need to accurately forecast cash at a daily or weekly level, explains Kim Greene, senior vice president and treasurer of Southern Company. Nonetheless Southern Company does do forecasts, both for daily cash management and longer-term planning.

The uses of forecasting are many and varied, Greene notes: Financial planning typically forecasts cash five years forward, primarily focusing on annual levels for years three to five and monthly levels for the first 24 months. Treasury forecasts vary between three months and 12 months. She says financial planning forecasts are based on monthly data while treasury forecasts use either daily or weekly figures. Financial planning forecasts are strategic planning tools to aid in long-term financing decisions and interest rate management, whereas treasury are for more near-term cash management, but in general they are all for liquidity planning, she explains. She adds that the biggest problem they have to deal with is reconciling between receipts and disbursements forecasts and strategic forecasts.


Kim Greene: Efficiencies reduce the need for accurate daily forecasts

For Swedish construction and property development company NCC, the focus is slightly different. Mattias Ekblad of NCCs treasury department explains: The main reason we use a system is to get a good picture of cash flow. Then we can use that information to decide how funding should be prepared. For example, we can manage how much funding goes into our commercial paper programs, and we can plan amortization on loans. In addition, management uses the forecast as an indicator of how the business is going; if cash flow is declining, they can take steps to deal with it.

In terms of our forecasting, all the business areas send a forecast once a week, Ekblad says. We do a four-week forecast reported on a daily basis, and we put together a three-month forecast on a monthly basis three months ahead.

NCC began using the OpusCapita Cash Forecasting solution in the autumn of 2005. This is a bank independent system, and that is a real advantage, Ekblad says. There are not really many forecasting systems in the market in Europe. There are a lot of treasury systems, and some have some forecasting capabilities, but they are not specially designed for forecasting; they are often an add-on for the system.

Many treasury departments are focusing more on managing cash flows, says Ekblad, but, without any really good system to see cash flow on a daily basis, it is difficult to forecast. It is almost impossible to do with Excel spreadsheets. You can do a daily forecast but not much farther out. In addition, to compare forecasts with actual outcome is quite impossible without a really good system. This is very important if you want any hope of improving your forecast, he explains.

Having a reliable forecast offers the opportunity for analyzing and optimizing. In the past, people spent so much time collecting information, but now they have time to think about their cash position and what to do with it. They have time to look at actual figures and plan based on actual information, not just a hunch or reasoning.

Any forecasting is only as good as the data that goes into it and the users who run applications. Timo Hmlinen, CEO of Finnish solution provider Exidio, explains: The problem that even the most sophisticated forecasting system cannot solve is the garbage in, garbage out problem. If the data from business units is not reliable, the consolidated forecasts cannot be much more. He says that improving the cash forecasting process should always include training so that the operating units understand the big picture and why it is important to provide the best available forecasts.

In addition, many companies do not use all the features that their systems can offer. They often move forward in baby steps, where they first web-enable their manual forecasting process and only after that start looking to integrate with their ERP and banks. The 20/80 rule works here, Hmlinen says. By getting the business units web-enabled but reporting their forecasts manually, companies will be laying out less than 20% of the efforts and price compared to the full integration project, but they will get at least 80% of the potential benefits. Due to the fact that the treasuries are usually lacking the resources and budget for large projects, the simplified model works for them, he adds.


Tuija Sipil: The huge change is really about the technology

Questions Remain

One big question on many minds is what impact new regulatory developments such as the single euro payments area (SEPA) will have on corporates cash and payments management. SEPA will rip out a lot of complexity for corporates, homogenizing as it will the eurozone in terms of transnational payments processes and pricing within it, says Graham Lloyd at PA Consulting. It will also shrink the number of bank relationships maintained by a corporate, thereby cutting costs, simplifying cash management and increasing negotiating power.

In addition, the European Payments Directive will strengthen and complement this and help ensure it reaches a much bigger territory than just those nations whose currency is the euro. We expect there to be some SEPA-creep even to US organizations, just as some US regulations, such as Sarbanes-Oxley, have crept into Europe, says Lloyd. This is because there is a simple arbitrage, of either cost or service expectation, between SEPA-compliant and non-SEPA payments.

Before the cash forecasting solutions market can gain more traction, there will need to be more tried and true success stories and likely some consolidation. There should be quite a market for this going forward because more and more companies are highlighting this as a big problem, notes Ekblad at NCC. There are a lot of big companies still sitting with Excel and faxes and so on. And, surprisingly, there are a lot of very large companies that dont have any forecasts at all. Just like 20 years ago.

Denise Bedell