GCBG members mull how to incorporate the unpredictable into cash forecasts, consider tax reform’s implications for pooling, hear what data science has to offer.
When members of the Global Cash and Banking Group met in May at the headquarters of fintech C2FO in Leawood, Kansas, cash-flow forecasting—a perennial challenge that technology vendors promise to address but never quite do—emerged as a hot topic of discussion. Members also exchanged information and frustrations on a variety of tech issues, such as electronic payments and lockboxes, and C2FO’s top data scientist explained the firm’s methodology for tackling data-related issues. Plus, Ernst & Young supplied experts to update members on the latest revelations regarding the new tax law. The meeting’s top three themes were:
1) Forecasting Cash Flow: Treasury’s Ongoing Challenge. Members shared details of their initiatives to improve cash-flow forecasting, including the technology they’re using and strategies for dealing with unpredictable corporate events that can significantly alter forecasts. They agreed that incorporating input from relevant parties across the company is essential and discussed tactics to prompt cooperation.
2) New Tax Law Reneges on Territorial System, Imposes Global Tax. The new tax law’s 21% corporate rate is among the lowest in the industrialized world. Rather than simplifying the tax code, however, the new law arguably made it more complex, especially in terms of a multinational’s overseas earnings. Ernst & Young experts detailed the changes and the potential impact on treasury, while cautioning that the law’s provisions are far from set in stone.
3) Data Science: A Cross-Functional Endeavor. Data experts from C2FO discussed the company’s approach to applying data science, comprising rule-based machine learning and logic-based artificial intelligence, and building a data strategy. Constant communication between treasury, IT, the businesses and other relevant departments is essential.
Forecasting Cash Flow: Treasury’s Ongoing Challenge
Two members walked the group through their companies’ methodologies for forecasting cash-flow, a recurring topic at GCBG meetings. Then the entire group joined the cash flow discussion, examining their greatest challenges to get the numbers just right. Here are some of the significant points that emerged.
KEY TAKEAWAYS
1) Remain committed to improving forecasts. One treasury operations manager described the company’s shift to the SAP treasury management system (TMS) from Quantum, now a part of FIS. The goals include refreshing data perpetually, instead of halfway through the quarter, to generate more timely forecasts, and eventually being able to determine transaction patterns at the customer level, rather than at the level of accounts payable or other categories.
2) Accept that you have to be flexible. A director of treasury whose company focuses on US cash forecasting said shifting from Excel spreadsheets to Quantum was “much better for us, but then a little thing called tax reform came around.” Most of the company’s cash is invested in overseas bonds at rates putting them in a loss position and making their liquidation unattractive. Layering on to forecasts the incremental cash the non-US securities are generating has required returning to Excel spreadsheets.
3) The human element is key. “What really drives forecasts are the things we can’t forecast,” one member said. So, input from relevant executives around the company is essential. Another member described the Excel spreadsheet “with a lot of macros” that her treasury sends out to those officials, showing the relevant cash forecasts and asking them to adjust for the one-offs. The treasury operations manager said treasury is developing the analytical piece to better project cash inflows and outflows while creating a framework touching departments such as human resources and legal to capture the unpredictable, one-off elements impacting cash.
4) Support from above. Having top-level management emphasizing the importance of communication is essential, a member said. Others mentioned encouraging that communication by tying performance reviews and even bonuses to forecast accuracy.
5) Prepare for errant buses. After realizing a few years ago that its Excel-based cash forecasting solution was insufficient, one member’s global company experimented with a variety of analytical tools. It settled on R, an open-source data analytics tool, at least for the foreseeable future. However, R requires a high level of programming sophistication, and while the company has such a programmer, “We realized recently that person might get hit by a bus,” the member said. To prepare for that possibility, treasury is moving the code and supporting logic to a shared server and spreading the knowledge among other staff members. A third step will be to develop visuals and analytics using the Python programming language.
Payments and Collections in Multiple Currencies
While only a few GCBG members said their companies use virtual bank accounts, most appeared to favor them. One said his tech firm uses Bank of America’s virtual account solution in Russia and Brazil, connecting multiple bank accounts in those countries using unique identifiers. Another said her company has entities collecting Singapore dollars in Singapore, Puerto Rico and Australia that are linked to a virtual account, which sweeps the money to a London-based, in-house bank account at Citibank for cash pooling.
Another member said her company is exploring J.P. Morgan’s Access FX product, which, similar to offerings by other banks, automates multicurrency payments by providing one central account that reduces the number of accounts between which payments and receipts occur to two, instead of 10 or more. The FX rate isn’t a bargain, but reducing the manual effort that would otherwise be necessary should more than make up for it. She said her company is piloting the product with one of its smaller entities, and plans to expand it to bigger affiliates if results are favorable. “It’s a little different than virtual accounts, but it might be an answer,” she said.
OUTLOOK
Now that pools of cash are no longer stranded overseas but available to fund operations if necessary, companies will have to be able forecast the cash needs of their foreign affiliates much more accurately. One member said applying machine learning to forecasts improved the company’s balance sheet forecasts significantly. Expect machine learning and artificial intelligence to increasingly creep into the forecasting process.
New Tax Law Reneges on Territorial System, Imposes Global Tax
Republicans originally promoted a significantly lower corporate tax rate and a territorial tax system similar to those of virtually every other developed economy, in which only companies’ domestic income is taxed. The new rate of 21% makes good on the first part. However, experts at Ernst & Young say the law institutes a complicated hybrid system containing elements of a territorial model but requiring multinationals to pay at least some tax on overseas earnings.
KEY TAKEAWAYS
1) There’s still hope. The president’s party typically loses seats in midterm elections. Republicans hope the new tax law will minimize losses, but so far it hasn’t gained a lot of traction politically. Justin Shafer, partner and US tax reform leader at E&Y, noted that GDP growth in the first quarter was 2.3% and consensus is that it will be 3% for the year. Big numbers may arrive before the election, driven in part by the 100% expensing provision that should fuel investment and productivity, but there has been little sign of that yet.
2) No big rush. The pre-meeting survey showed that 39% of responding members expect their companies to repatriate between $1 billion and $9 billion, with 6% expecting more than that, and 11% between $500 million and $1 billion. But 34% anticipate the repatriated cash won’t be fully deployed until at least the latter part of this year, and another 20% put it well into next year. Share repurchases and dividends are the priority destinations for the cash, at 47% and 40%, respectively. Mr. Shafer said that 530 companies have publicly announced increasing wages for employees or providing one-time bonuses, but the dollars they’re committing to employees are dwarfed by those going to share buybacks.
3) Hybrid system upends MNCs’ financial structures. The tax law freed up trapped cash, but once corporates pay the one-time repatriation tax, where will the cash go? And how will carefully planned financial structures change to optimize tax exposures? The complex global intangible low-taxed income (GILTI) provision levies an effective 10.5% rate on certain foreign income, while the base erosion and anti-abuse tax (BEAT) imposes a minimum tax to limit deductibility of certain payments to foreign related entities. Pay special attention to BEAT, said Rebecca Coke, principal at E&Y, since landing on the wrong side of a threshold can result in a tax exposure “cliff.”
4) Proceed cautiously. Democrats have proposed an alternative tax plan, which includes raising the corporate tax rate to 25% to help fund various initiatives, including infrastructure. “They don’t intend to change the international provisions, and they seem to like the 100% expensing provision, but who knows?” Mr. Shafer said. He added that to make changes to the law, Democrats would have to win the House, Senate and presidency, which is probably three congresses away, “so things could change.”
Tax Reform: Can Pools Be Merged?
“The million-dollar question every treasurer asks me is, ‘Can I combine my pools now?’ ” said Tim Wichman, a partner in the national tax department at E&Y. Under previous tax rules and regulations, US multinationals typically operated physical pools domestically and a combination of physical and notional pools outside the country; but any borrowings by US entities from foreign pools were prohibited. Combining the pools would increase transparency and control over cash balances that could impact treasury departments in a big way. But Mr. Wichman said there’s no simple answer about how to do that, because the new law keeps Section 956 of the Internal Revenue Code, which can turn certain loans, pledges and guarantees involving controlled foreign corporations (CFCs) into deemed distributions to the US parent. The section was expected to be removed in the move to a territorial tax system, but it mysteriously reappeared at the last minute in the bill signed into law. Merging physical cash pools would be more straightforward if the pool leader were respected as the lender for US tax purposes; however, the US tax consequences can be uncertain in the case of notional pools or physical pools where the pool leader is treated as a conduit.
OUTLOOK
The fun is just beginning. More than 50 countries are engaged in or contemplating tax reform. Corporate treasury must make tax colleagues their best friends to understand how these changes will impact their companies’ carefully planned global financial structures.
Data Science: A Joint Effort
Data experts from C2FO discussed the company’s approach to applying data science. The combined processes comprise rule-based machine learning and logic-based artificial intelligence, defined respectively as computer programming that accesses data to drive outcomes from signals and patterns, and the use of “intelligent machines” that work like real humans. John Young, C2FO’s chief data officer, said building a data strategy requires defining the initiative’s proper scope, delineating necessary information and determining when human intervention is required. Collaborating to complete those steps enables the proper choice of technologies to implement.
KEY TAKEAWAYS
1) Communication, communication, communication. Constant communication and collaboration between treasury, IT, the business and other relevant departments are essential to ensure the data solution meets users’ needs and the strategic goal, and avoids finger-pointing. “I’m a huge fan of cross-functional coordination, not just because that’s how data science works, but because it leads to successful deployments and meeting business needs,” Mr. Young said.
2) Predicting big-box demise. GPS technology provider Garmin’s application of robotic process automation (RPA) to accounts receivable allowed it to track trends in the receivables balances of its customers, according to Kerri Thurston, C2FO’s CFO and formerly the global controller at Garmin. “We were able to see trends in balances, and we would be immediately alerted if a customer fell out of its normal pattern,” she said, adding, “That was important with customers like Sears and Circuit City. We were able to see some of those big-box retailer trends via machine learning that had been instituted in our cash-flow forecasting process.”
3) On the horizon for data science. C2FO sees data science changing several treasury-related functions, including: automating FX risk management and hedge reporting and compliance; simplifying the KYC process with banking partners; and enabling fraud detection via real-time payment screen algorithms.
Stupid Lockboxes
One member said that in Europe almost all receipts are electronic, but her company posted them manually until treasury’s programmer wrote software that searches out invoice numbers and other information on the payment to identify the customer. Turning to the US, the programmer questioned the need for an expensive bank-operated lockbox to receive and scan payments and deposit them in the company’s account. Her company no longer uses a lockbox for electronic payments, and at some point plans to get rid of it for checks.
That may happen sooner rather than later. “All the people we’ve hired in treasury over the last few years have never actually written a check themselves,” said another member, adding, “One guy said, ‘If I have to write a check for my landlord or something like that, I ask my mom to do it.’ ” Following a burst of laughter, he added that his department discovered that errors or mismatches on electronic payments prompted the bank to send a paper check to the company instead. His group estimated that 10% to 12% of the payments the company received that way should have been more cost-effective electronic payments. The problem can be solved, he said, by reaching out to payment aggregators and bill-paying services and asking them to switch the checks to ACH or electronic payments. “You can ask your bank to look into the number of payments it can fix through approaches like this,” he added. “But it’s probably not in their best interest, because they make more fees when there are complications.”
OUTLOOK
Treasury positions will likely become strategic in nature and add value as machine learning and AI take over the more repetitive work, but there may be fewer of them. Adapting to this transformation requires a willingness to learn new skills and leverage fintech.