TCM Guide : Future Perfect

Cashflow Forecasting

With both regulatory and market forces demanding more effective and transparent use of cash, treasurers are under increasing pressure to improveand speed up cashflow forecasting.


There are many forces at work on any corporate treasury, both internal and external. The changed regulatory environmentwith the advent of Sarbanes- Oxley and Basel II, among other regulatory developments has been a big driver of greater transparency in financial processes. In addition, market forces have propelled the need for more efficient use of inhouse cash.

In order to meet those needs, corporates must understand how and when cash moves within and outside their organization, and they must have a clear picture of how this will develop in the futurehence the need for strong cash forecasting. Despite the attention that has been paid to it in recent years, forecasting continues to be one of the biggest bugbears of the corporate treasurer. Indeed, creating an accurate forecast remains one of the hottest discussion topics at most treasury gatherings.

Dan Blumen, a partner at Treasury Alliance Group, says that there are a number of reasons why the past few years have seen such a focus on cash forecasting. Blumen explains: There are tremendous control requirements coming out of Sarbanes-Oxley, and as a result companies need to know what is going on and where cash is across the organization. In addition, from a market perspective your own cash is your cheapest funding, and good cash forecasting is a good way to unlock this source of funding, he says. Companies are really trying to put in an effective cash management structure, and cashflow forecasting is a key element of this, he adds.

However, there are a number of challenges to overcome in getting to the point where forecasting can be helpful. For instance, much more information is now available to the corporate treasury, but the question is how to bring it together and process it in a way that is meaningful for forecasting purposes.

According to Lisa Rossi, global head of liquidity management and US product management at Deutsche Bank, the challenge for corporates is to take advantage of the centralization of information and real-time information flows now possible from banks and other sources. Corporates need to leverage the consolidation format of all this information. Banks are stepping up to the plate with many features/systems that help bring together information in standardized ways. Treasurers should be encouraged to have increased dialogue with banks to manage the process of consolidating and assimilating all this information, she says.

Another issue for treasurers looking to improve forecasting is having the internal backing to bring about change. Says Blumen, The issue is that treasury people know what is needed but dont have the technology budget to get the necessary tools, and the technology people have the budget but dont understand the needs of treasury. Once there is greater understanding of the necessity of this and more focus on a higher level, and that trickles down to those with the budget in IT, then change can happen.

Finally, corporates must be able to choose what approach to take, what technology to use and how to implement available tools to best advantage. With so many solutions out there to address just this, the difficulty is sorting out what is useful and what is not.

Rossi says that her discussions with clients center on increasing the use of technology that can automate processes so that end-of-day positions are more accurate, rather than waiting for inflows or outflows that have already occurred. Corporates are much more interested in

discussing new systems and product opportunities that help automate such processes. It is a benefit for everyone. For their clients, for their own receivables and disbursements processes, the whole flow of information improves, she says.

Once a company has chosen what technology best suits its business, the next thing to consideris how to use it to best advantage. Sanjay Srivastava, chief operating officer at Aceva Technologies, believes there are three important elements to consider in taking a best-practice approach to cash forecasting. First, the test place to begin forecasting is where the rubber meets the road. By that I mean it is important to capture data from the most basic sources, he explains. For example, a lot of information is exchanged on the telephone between a companys accounts receivable department and the accounts payable department of their clients. Technology now can help you to efficiently capture as much information as possible on a granular level without significantly increasing the workload of your departments, he says.

Second, it is important to create a system of integrative forecasting, Srivastava says. Integrating information from a number of different sources is critical to having a good forecast. You need to take current data along with historical data and bring it together to come up with a holistic forecast, he explains.


Srivastava (top): Try to

capture data from the most

basic sources Blumen

(bottom): Your own cash is

your cheapest source of


The third key element, according to Srivastava, is ensuring a closed loop performance management cycle. It is important to create your forecast, analyze the effectiveness

of it and feed those results back into the forecast in order to improve future forecasts. This is a great tool for motivation, and the learning that comes from it can help you to improve both your internal and external business process cycles, he says.

As the need for good forecasting continues, the market is looking at new approaches and new ways to use the technology that is available. For example, there has been a push to use business intelligence (BI) strategies to help drive better forecasting across an organization.

Blumen explains that BI is already in use in other parts of the organization.

By using this approach, you can take all the information already available around your organization and put it to use in forecasting. Why not use that as your approach

rather than hoping for a silver-bullet solution to suddenly appear? he says. Rather, you can use BIwhich already exists within your organization to go to various sources and integrate group-wide information for a good cash forecast. BI is a good way of tapping expertise on a granular level because it goes into all the different systems around the world, it gathers data, integrates it and creates a forecast from there, he explains.

While Treasury Strategies and a number of other organizations are pushing the BI approach, there is no large corporate so far that has moved to a strictly BI approach to forecasting, explains Blumen: No one has gone out yet and said we consciously want to use BI to solve our forecasting problems, but many organizations are using the techniques to some extent.

Although no tool will ever create a perfect forecast, there is a determined drive to fine-tune the process. Says Rossi, The improvement of real-time information flows, and the technology that banks and service providers are developing, improve processing of receivables and disbursements and enhance a corporates forecasting ability.

Denise Bedell