Editor’s Note: Kyriba recently hosted a highly attended webinar, “Why Treasurers Can No Longer Ignore Accurate Cash Forecasting,” with Treasury Consultant Elizabeth Ecsy from Accenture and VP of Strategy Bob Stark from Kyriba. The lively discussion addressed the importance of an accurate, reliable cash forecast against the backdrop of U.S. tax reform, rising interest rates and heightened shareholder and activist investor scrutiny. This blog highlights the key concerns impacting treasury and finance professionals in 2018 and recommendations to create a more accurate cash forecast from Ecsy and Stark.
Cash flow forecasting is nothing new – but in today’s market, it’s more important than ever to forecast accurately.
Ten years ago, this topic was unlikely to be a high priority – at least for cash-rich companies. But all that changed following the financial crisis, which brought more detailed questions from CFOs and shareholders alike about how cash is used within the business. More recently, rising interest rates have led some companies to review their investment policies, while the U.S. tax reform is prompting shareholders and analysts to ask organizations about their cash repatriation plans.
Related reading: How to be a Better Business Partner to the Board
The growing importance of forecasting to treasurers was emphasized by a poll taken during a recent Kyriba webinar, with 39 percent of participants noting that the value of cash is higher as a result of rising interest rates. Meanwhile, over a third highlighted the expectation that they should use cash or return it to shareholders.
But while accurate forecasting provides greater certainty over cash flows, achieving this is not always straightforward. The webinar’s participants were also asked about their forecasting challenges, which included creating multiple forecast scenarios (57 percent), adding multiple variations to recurring flows (50 percent) and extrapolating trends from historical data (43 percent).
Other challenges may include:
- FP&A. Not all forecasts are the same – so it’s important to identify any discrepancies between the cash forecast and the P&L.
- Visibility over cash. It’s not enough to gain visibility over the bulk of your cash, as the remaining flows can still be significant. Aim for no less than 100% visibility.
- Forecast data. It can be challenging to integrate different data sources and systems into the forecast. It’s important to identify the best data sources within the company, and to understand that these can change over time.
- Technology. Spreadsheets may be easy to use, but the lack of controls and audit trails is problematic in a treasury context. It’s also difficult to carry out specific actions using spreadsheets, such as creating multiple forecast scenarios or forecasting the impact of currency movements.
Perfecting your forecast
In the quest for accurate cash forecasting, you first need to pin down what you are forecasting and why. A number of different approaches are available, from 13-week cash forecasts based on bank actuals and forecast data to indirect forecasts from the P&L.
It’s also important to automate the consolidation of forecast data. In the past this might have been seen as an IT exercise, but today’s treasury technology makes it straightforward to map out different structures within the system. Treasury technology should also support different forecast versions and enable you to assess the impact of different scenarios.
Last but not least, it’s essential to measure the accuracy of the forecast by carrying out a detailed variance analysis to identify any discrepancies. Remember: if you don’t evaluate how well your forecast is working, the whole exercise will have very little value. For the complete webinar playback with additional tips and tricks to perfect your cash forecast, go to the weblink.