The following list is a summary of key suggestions introduced at a Global Cash and Banking Group session led by Deutsche Bank’s Lisa Rossi, a managing director and global head of liquidity management and investments for cash management, global transaction banking.
It focuses in particular on those intended to help treasury overcome the pain points associated with collecting good data from all the BUs (including sub-unit functional areas like AR, AC, planning and payroll).
- Drive consistency for data-gathering from business units. This would include consistency of process, accountability and the discipline to maintain the commitment. Defining one process for all business units to follow allows for refinements and modifications to be a single message instead of many. It probably is best for treasury to develop a consistent methodology in line with its cash management needs and also ensure business units have access to the same tools, are trained in their use and are required to use them.
Insisting on regular time intervals to submit data gathered is also important, and policies should address both the timeliness of submissions and ensure like coverage of time horizons across the firm (see chart below). Since different constituents will have a need for cash forecasts for different time horizons, provisions will need to be made to ensure that forecasts consistent with the established methods are being generated to suit them.
- Require accountability. Business units should be held accountable by designating a single point person for addressing questions. The business units should perform regular variance analysis and be held to specific metrics to assess forecasting accuracy.
- Incent the business units. Another way to establish accountability is to reward good cash reporting. Typically, treasury only reports cash flow, they don’t control it and business units have many other priorities with which treasury has to compete. These other priorities are likely to be more meaningful to them than reporting cash data to treasury and forecasting from this data what their future cash flows will look like. Therefore, incentivizing the business units can be helpful to bring greater focus on, and understanding of, what keeps the company going: CASH.
One increasingly common practice is to define a benchmark for variance and charge units for being outside the parameters. “We incent them to bring in cash by month-end. They have working capital targets and if the actual is not what is expected, they get charged for additional working capital funding,” stated one GCBG member. Several other members affirmed this practice.
- Educate the business units. Other business and finance managers are focused on their operational role and cash often does not resonate with them. Therefore, educating them on the importance of cash to senior management and the health of the company can help keep the process going strong and not lose momentum. Inform them of the benefits of good forecasting and work to maintain frequent and quality communication with each sub-unit.
- Lean on your bank(s). Banks can play a helpful role in refining the forecasting process. One way is to take advantage of liquidity structures they offer that can help organize and visualize cash flows. Second, maximizing the use of electronic transactions such as ACH and purchasing cards both for collections and receipts will create more predictable, timely and accurate cash flows. Finally, approach your bank(s) about firm objectives and ask them to help you with solutions and not just sell you products.
- Get closer to your bank account information. Another way that banks can help with cash-related information is to improve your account visibility. Ask them to help aggregate bank account data wherever possible, or help treasury to do so with their treasury management systems (TMS), or SWIFT, to minimize information gathering touch points. It may also help to map out your physical account structure to categories of spending at receipts. This way the reconciliation process ties more easily back to forecasted cash flows for each category on the forecast templates.
Visibility is part of the reason SWIFT has become so important to many companies. Yet, it is really the XML reporting underlying SWIFT that allows treasury to not just see balances, but to aggregate them, auto-reconcile accounts, and build better cash-flow history by business unit, geography or currency.
- Maximize your technology. XML reporting whether via SWIFT or not, is just one technology lever to employ. Treasury should evaluate its technology options and make the most of what is available in an attempt to move beyond spreadsheets (see sidebar below). As Ms. Rossi pointed out, “so much information gets aggregated, formatted, and uploaded into a centralized database—only to end up in a spreadsheet.”
Why Excel Remains No.1 Tool
In a recent survey, all but one member of The NeuGroup’s Global Cash and Banking Group indicated that they used spreadsheets in their cash forecasting activities.
In spite of progress over the years with treasury management systems, ERP modules and bank solutions, why does the spreadsheet remain the number one tool for cash forecasting?
- Still relatively efficient. One reason that spreadsheets tend to dominate cash forecasting is that more expensive or targeted solutions prove little more efficient.
- Simplicity reigns. Another reason to rely on spreadsheets is that everyone knows how to use them. Further, the analytics capabilities within a spreadsheet are more than adequate to model future cash flows using historical information.
“We used to have elaborate forecasting models, but we eventually took a step back and looked at each of the receipts and payments for each account for a five year history and compared that to revenue and cost of goods sold (COGS) on accounts payable. It was amazingly accurate— better than the complex model” stated one group member.
While spreadsheet plug-ins can do simple analysis, new tools that can leverage all the information available in firm data warehouses are becoming available. “It’s been a long time coming, but you will see more cash forecasting packages in the market,” according to Ms Rossi. “They combine statistical analysis, algorithmic trending, forecasting workflow management, bank artificial intelligence feeds, and market-driven scenario analysis.”
The question is, will treasury be ready to move beyond the spreadsheet to embrace them.
- Highlight data in C-Suite Reporting. If the key to improving cash forecasting is getting easier access to better data, then senior management needs to make access through common channels, fostering accountability for data providers with incentives and education, leveraging banks and bank information, plus maximizing new technology a priority too. In this regard, it will also help, for example, if treasury can make a credible case to all sources of cash forecasting data that it will be reported and acted upon by senior management. If the C-suite values the information, they will also support greater investment in ways and means to improve it.
Reliance on Others
Most cash forecasters are dependent upon numerous others to provide the needed information to make a forecast. Getting them to deliver quality information consistently requires the following:
- Establish data ownership. While cash forecasts often have owners that care about its quality, the providers of data to the forecast often do not have ownership of the information. Thus, there should also be an organizational mandate that each cash forecast has one point of contact or team who owns the accuracy of the information upon which a forecast is based.
- Establish data context. To maximize the forecast benefit, these data owners should also clearly understand the purpose of the data as it relates to the forecast. Ideally, the data owners will have a need for the cash forecast, or some component of it, to further direct their attention to data quality.
- Tie cash to planning process. One way that Deutsche Bank’s Lisa Rossi recommended to help bring these elements together was to link cash forecasts to the planning process, down to the subsidiary plan level.
For example, the final sub-plan that cash management builds its estimates from are a reality check for the business unit head. Further, if any changes in a sub-plan are immediately communicated to the cash forecast owners, they can refine their assessment of likely cash flow and the quality of the data being provided to their cash forecasts. Awareness of plan changes adds context to the data, and a history of actual discrepancies flags the need for better data ownership.