In the 2015 survey that we conducted in collaboration with the Association of Corporate Treasurers (ACT), treasurers indicated that they spent more time on cash flow forecasting that any other activity except risk management and attending meetings.
If treasury is spending so long on cash forecasting, it is either very important or existing processes are inefficient. In many organizations, both are true: cash flow forecasting is critical to effective liquidity and risk management, but there are considerable problems in accuracy, timeliness and resource requirements. Therefore, the more time that is spent on the process of forecasting, the less there is available for analysis and decision-making based on the results.
Additional reading: Five questions CFOs should ask to maximize growth
1. Why does it matter to me?
An effective cash forecast directly impacts many key performance indicators that CFOs and senior finance executives regularly measure, and on which they are themselves measured, from return on investment and cost of funds through to liquidity and solvency ratios, cash flow and working capital metrics, amongst others.
If forecasted cash flow falls short of the forecast, the cost of funding can increase dramatically, as does the risk of working capital drying up and bank covenants being breached. Conversely, if net cash is higher than forecast, investment returns are depressed, while opportunity costs are increased, particularly in low margin, capital or innovation-intensive industries. In addition to liquidity management, cash flow forecasts form a critical basis for identifying, monitoring and hedging risk.
Additional reading: Four steps to 100% cash visibility
These problems, particularly lack of available or affordable financing, are real concerns that have resurfaced with banks reviewing their own portfolios due to Basel III compliance. Banks are becoming more selective in their financing decisions, and in some cases encouraging clients to consider off-balance sheet financing methods, such as receivables or payables financing. These alternative financing programs take time to set up and rely heavily on accurate forecasts, further emphasizing the value of cash visibility and forecasting accuracy.
It is therefore in every CFO and senior finance executive’s interests to ensure that treasury is equipped to produce the most accurate, complete and timely forecasts possible to improve key performance indicators and inform high quality decision-making.
2. Why is it so difficult?
Having the right people and technology is key to effective forecasting, but the obstacles are often organizational as much as technical. Forecast data is typically held in different systems across the group, and often in quite different formats. Technically, data can be aggregated and uploaded into a treasury management system easily enough, especially with the adoption of cloud treasury systems. However effective the technology, though, the bigger problem is that owners of this data may not be aligned with treasury’s interests or timelines and are often outside of treasury’s direct authority. As a result, treasury is unable to influence the behavior and priorities of local finance teams and other departments that contribute to the forecast directly.
3. What should I do?
The CFO can help, as they have reporting authority over treasury, accounting, local finance teams, and FP&A. The CFO can remove organizational and technology investment barriers, while also creating the team environment that result in forecasts that are accurate, complete and up-to-date. A strategically minded Treasurer can help influence these outcomes to help their own cause, of course.
However the conversation begins, the CFO – who needs an effective cash forecast – and the treasurer can optimize how much time is spent on forecasting in the department, what the challenges are, and strategies for overcoming them. These could involve new, or better implemented technology, but more effective engagement with the wider business is likely to be an equally, if not more important factor. Therefore, CFOs can help to facilitate this engagement, provide motivation and education, and align objectives across the business.
Additional reading Kyriba / ACT 2015 treasury survey