The financial crisis put an end to the idea that cash forecasting could be a multi-year enterprise with any chance of relevance. Two years, yes. Three? Well, anyone basing business decisions on that time frame may come away burned, given how fast the markets and the larger economy evolve.
Nonetheless, the crisis has prompted a fresh look at cash forecasting, visibility and working capital initiatives: what’s realistic and what’s useful. The topic was a central concern at The Treasurers’ Group of Thirty and the Global Cash and Banking Group meetings last month. But, like most challenges in treasury, there emerged some useful guidelines and tips, but no easy answers.
T30 members noted that the crisis has taught that forecasting is vital and that there are ways to win improvements, starting with incentivizing the business units to provide as accurate a forecast as they can—and ensure their data is spot on.
However, these gains were hard won and further gains in refining cash and working capital initiatives will be harder still. “We see further the ability to further pursue wins for the next two-three years,” one member noted, “but there is a concern about how to continue to improve performance after that.” Members don’t have a sense of how much improvement is enough, but now is not yet the time to signal that enough has been done. In fact, here are some forecasting topics bandied about by members of the GCBG and the T30 last month:
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You need two different things: a cash balance versus a cash flow forecast. A cash balance is no challenge. But a cash flow forecast is a really difficult number to devise since many of its underlying variables can change quickly.
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Basing part of annual compensation on free cash flow, rather than earnings alone, helps focus employees on it.
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The holy grail of integrating cash processes into a strategic planning process remains held up by continued reliance on spreadsheets. Some members say that checking discrepancies with cash flow forecasts, and having specific cash generation targets, can help a company more toward having a more consolidated process.