Latin America sometimes poses challenges to even the strongest cash forecasting programs. That’s because factors like currency controls and weaker bank offerings can sometimes distort or impede cash forecasting. That’s just one of the takeaways at a recent meeting of the Latin American Treasury Managers’ Peer Group.
Generally speaking, members report that LatAm seems to be behind the rest of the regions in which companies forecast. Most members consider their cash-flow forecasting to be at least satisfactory. The weaker elements of their processes are automation and accuracy, both of which lag behind other regions. This is not unexpected as the bank disparity and currency control sometimes force corporations to leave the region outside of global systems and liquidity structures. Also, members said that forecasting data is most commonly provided at the local level, with input from various corporate functions. However, these local teams are not accountable for accuracy, which usually falls on treasury.
In contributing to the conversation, two members discussed their cash forecasting process overall. One company uses both direct (1‐year out) and indirect (5‐years out) cash methodologies to project cash. The treasury team relies on different areas and controllers to provide cash‐related information (e.g., PBT, inventory, investment spending, D&A, cash taxes, etc.). Treasury is ultimately responsible for the accuracy of the cash forecast, but these areas are informally held accountable for the information they provide.
The inclusion of these teams in the forecast discussions and making them responsible for the explanation of variances on their respective lines have been great tools to engage the different areas involved in the process. This company’s process is mainly manual, with only 10‐20% of inputs coming from automated systems. However, the company has a significant number of headcount involved in the forecasting process when compared to other companies. Having said that, recent changes in the workforce have forced the company to revise its processes and become more efficient and work smarter to deliver results.
Another company presenting reported that it mainly uses a direct methodology to forecast cash. The company forecasts cash in great detail, going as far as forecasting by day for the upcoming two quarters. Its process is greatly automated and relies on a system that can match forecast and actuals at the bank account level. The cash is mobilized and concentrated on a cash pool, using the forecast as a reference and just leaving the needed minimal working capital at the country level. The company relies on local teams to provide forecasting data. Its systems allow them to track variances as well as to identify trends on how conservative/aggressive each team is in its forecasting. Although the individual teams are not responsible for accuracy, treasury relies on executive support to engage the teams and keep them committed to providing timely and accurate information.
The results showcased by both companies were impressive, but that level of precision might not be optimal for all corporates. As the second presenting company mentioned, its “obsession” with cash forecasting makes sense in light of their very specific liquidity needs. For most companies, however, there is a cost/benefit analysis that needs to be performed to find the right balance between resources devoted to this process and the results based on the companies’ priorities and the market conditions.