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Leaping the Barriers to Perfect Cash Forecating

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Corporate treasury teams continue to struggle with developing an accurate and reliable cash forecast, affecting their ability to optimize cash returns, meet hedging policies, and mobilize cash globally. In this webinar, Treasury Strategies and Kyriba will tackle the reasons why treasury teams have difficulty perfecting their cash forecasts and highlight new opportunities to achieve value through forecasting.

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Leaping the Barriers to Perfect Cash Forecating

  1. 1. Jeff Diorio | Director| Treasury Strategies Bob Stark | Vice President, Strategy | Kyriba February 16th, 2017
  2. 2. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 2 Jeff Diorio Director Treasury Strategies jeff_diorio@treasurystrategies.com Today’s speakers Bob Stark VP, Strategy Kyriba Corporation bob@kyriba.com @treasurybob
  3. 3. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 3 Today’s Discussion 1) Forecasting challenges 2) Why forecasting needs to be a priority 3) Overcoming barriers to forecasting – Spreadsheets are easy – Identifying the right approach – Direct vs. indirect methods – Assessing forecast accuracy
  4. 4. Forecasting Challenges
  5. 5. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 5 Importance of forecasting to companies? Source: Treasury Strategies 2017 State of the Treasury Profession survey. Rank 2017 Rank 2016 Rank 2015 Cash forecasting Financial risk management, FX Treasury staffing levels and skill sets Treasury functional organization Treasury management systems 1 2 3 4 5 1 2 8 3 6 1 2 3 5 7 Bank relationship management Best practices Operational efficiency Balance sheet optimization Bank service fees 6 7 8 9 10 4 5 10 9 - 6 4 9 11 -
  6. 6. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 6  A majority of organizations indicate they have ineffective cash forecasting processes  Many organizations face the same kinds of forecasting challenges: Why are there barriers to overcome? Insufficient resources Ineffective forecast methodology, tools Poor information access/exchange Poor internal knowledge of cash flows GIGO (accurate data sources) Low priority by senior management Organizational complexity Inconsistency between short-term cash forecast and budget
  7. 7. Why forecasting needs to be a priority
  8. 8. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 8 1) Avoids liquidity and capital issues 2) Maximizes the value of cash 3) Improves the effectiveness of risk management 4) Returns value to stakeholders 5) Improves the financial performance of the company 6) Supports Treasurer’s contribution to strategic planning Forecasting is a priority because…
  9. 9. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 9 Increased Investment  By improving forecast accuracy, CFOs are able to reduce idle or underinvested cash balances and increase returns on cash  For every $10M of idle cash freed for strategic investment, bottom line impact can be > $100,000/year  Centralizing cash through In-House Banking / Cash Pooling will uncover more idle cash (and increase mobility back to subsidiary entities) Why Forecast – Increasing Investment Income
  10. 10. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 10 Reduced Borrowing  Many organizations maintain idle balances but also have short term and/or long term debt outstanding  Without a reliable cash forecast, Treasurers hesitant to commit to debt repayment (save for a rainy day)  Typically revolver is first to be paid down (more flexibility) but lately some treasurers don’t want to lose availability so will pay down outstanding bonds instead Why Forecast – Debt Repayment/Reduction
  11. 11. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 11 Hedge Effectiveness  A better forecast means a better hedge program  For a $1B distributor with 50% global revenues, a 1%↑ in USD means $500M of global revenue becomes $495M  Increasing hedge coverage from 50% to 75% protects $1.25M for every 1% ↑ in USD Why Forecast – Improving FX Hedging Effectiveness
  12. 12. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 12 Why Forecast – Excess Cash Balances Shareholders want value from free cash flow & excess cash balances Shareholders have visibility into your balance sheet and cash flow statement Shareholders demanding return on cash – or return of cash Complete visibility => confidence to make future decisions regarding excess cash (regardless of location or currency)
  13. 13. 13© 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 13 Why Forecast – Excess Cash Balances Repatriating cash from overseas  Upcoming tax holiday is widely expected  A good forecast will confirm where/when cash is needed in overseas markets so that repatriated cash is maximized  Without a reliable forecast:  Lost value  Increased scrutiny by shareholders
  14. 14. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 14 Working Capital Improvement  Improved visibility into cash flow needs and supplier payment terms identifies value of extending DPO  Determines ROI of a supply chain finance program  Sample scenario: – $1B annual supplier spend – Term extension of 30 days – Annual free cash flow gain of $83M – Income of $50,000 Why Forecast – Working Capital Improvement
  15. 15. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 15 Today’s Discussion 1) Forecasting challenges 2) Why forecasting needs to be a priority 3) Overcoming barriers to forecasting – Spreadsheets are easy – Identifying the right approach – Direct vs. indirect methods – Assessing forecast accuracy
  16. 16. Spreadsheets
  17. 17. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 17  Spreadsheets are easy…when your forecast is easy  Become less effective when integrating data sources  Not truly multi-user – Lack controls – Lack audit trails  Can’t store multiple versions – e.g. variance analysis  Poor business continuity Limitations of spreadsheets 7/14/14 7/15/14 7/16/14 7/17/14 7/18/14 7/21/14 7/22/14 Mon Tue Wed Thu Fri Mon Tue 582.00 598.49 1037.44 1283.22 554.96 515.13 536.16 46.49 104.95 0.78 2.74 0.17 51.03 165.33 (30.00) (30.00) (30.00) (30.00) (30.00) (30.00) (30.00) (50.00) (10.00) (651.00) (11.00) (100.00) (125.00) (125.00) 500.00 500.00 598.49 1037.44 1283.22 554.96 515.13 536.16 671.49 (250.00) (625.00) (1000.00) (1000.00) (1000.00) (1000.00) (1000.00) Ending Balance CP Outstanding All balances are in MM Netting Payments/Receipts Treasury Wires IC Payments/Receipts Borrowing Activity CP Maturing CP Issuance Expected Payroll Domestic Cash Forecast Beginning Balance (MMF) Cash Activity Expected Receivables Expected Payables
  18. 18. Approaches to Forecasting
  19. 19. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 19 Treasury Forecasts They should be linked, but all have different objectives and uses Near-Term Medium-Term Long-Term Objectives Daily cash positioning Invest/borrow decisions Liquidity planning, borrowing decisions Long-term capital management and earnings protection Horizon 1–4 weeks 13–18 weeks 12–18 months Detail Most granular, account level details Medium Summary level detail; focus on balance sheet, business categories Frequency Daily Weekly Monthly or Quarterly Update Intraday, as needed Weekly Monthly Treasury can have multiple forecasts – different time horizons
  20. 20. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 20 Capital Budget vs. Liquidity Forecast Business Strategy Capital Structure Liquidity Forecast Budget Budget Indirect/top-down (FP&A) vs. direct/bottom-up (Treasury) approach to liquidity
  21. 21. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 21 Reconciling budget cash with liquidity cash is difficult There are differences Reconciling: Budget vs. Liquidity Budget Pro Forma Financials GAAP Accounting Ledger Balances Long Term (1–5 yrs.) Periodic Updates Liquidity Liquidity Management Actual Cash Available Balances Less Than 1 Year Frequent Updates  Different goals  Different perspective  Different measure of cash  Different time horizon  Different schedule
  22. 22. Building the Forecast
  23. 23. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 23 Two distinct approaches 1) Direct (build from data) – Specific known upcoming cash flows – Estimate from history 2) Indirect (top down) – FP&A approach Determine the Forecasting Approach
  24. 24. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 24 Find the right data sources Bank Reporting Cash Forecast Business Units Spreadsheet Models ERP Investments and Debt Historical Data Internal TeamsDerivative Positions Payments Effective forecasting Choosing the right sources and models for the different forecasting line items
  25. 25. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 25  Importing cash flows doesn’t need to be an IT exercise – System should take any format and ‘file structure’ without IT help – Want to import detailed numbers and/or import sum totals and spread across days – Accommodate versioning of forecasts Importing Cash Flows
  26. 26. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 26  Repetitive cash flows can be modeled for any frequency, with variability by day, week, month – Best used to create a placeholder – Later replaced with more updated forecast data from other sources Recurring Cash Flows
  27. 27. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 27 *Visibility* Typical Workflow 1) Decide action and adjustments (e.g. average or trending of historic flows) 2) Select historic cash flows to extrapolate forward (dates and filtered query) 3) Determine date/periods to project forward Extrapolation of Data
  28. 28. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 28 • Building scenarios upon existing forecasts – Changes in market conditions  impacts sales, supplies, inventory – Changes in interest rates  impact on cost of debt – Changes in FX rates  impact on exposures What-if / Scenario Analysis
  29. 29. Assessing Forecast Accuracy
  30. 30. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 30 1) Perform variance analysis • Forecast to Actual • Forecast to Forecast • Multiple frequencies 2) Analyze forecast effectiveness • By line item • By time period 3) Report back to data sources or review 4) Update the forecast with improved data 5) Rinse and repeat Forecast Accuracy – Ongoing Variance Analysis
  31. 31. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 31  Require detailed variance analysis to find the discrepancies  Need multiple time snapshots – quarterly assessment insufficient  Data visualization can be easier to target problems Forecast Accuracy – Analyze forecast effectiveness
  32. 32. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 32 Building the Forecast: Putting it all Together Centralized Collection Tool Forecasting Model Variance Analysis Output Reports to Users Forecast Refinement Process Data Sources Business Units Financial Units Internal Systems Bank Data 1. Data Gathering 2. Execution 3. Variance Analysis & Analytics 4. Reporting 5. Refinement
  33. 33. In Summary…
  34. 34. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 34 Cash Forecasting – Conclusions Creating the cash forecast. Understand the objectives and benefits before rolling out cash flow forecast exercise. Flexibility to align your data, the accuracy of the inputs will determine the best methods to build your forecast effectively Many reasons to forecast: Meeting the objectives of management and shareholders is critical. Cash Forecasting is important if you are “cash rich”. Multinationals with significant foreign revenues must forecast better in order to hedge effectively. Measuring the forecast is the most important part of forecasting. Without measuring forecast accuracy, it is impossible to know if you are good at forecasting. ROI of cash forecasting is very high. Can be measured by investing longer with higher returns on cash, repaying debt, earning yield from early supplier payments, and the value of foreign cash protected through effective hedging
  35. 35. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 35 – Comprehensive mapping of all cash flows and strong understanding of cash flow volatility drivers – Strong communication with providers of information – Tools that support data gathering, modeling and consolidation – Dynamic trending and variance analysis tools – Accurate assessment of aggressiveness/conservativeness level  Evaluate the consequences of inaccuracy.  Review actions taken based on forecast. Cash Forecasting – Final Thoughts
  36. 36. Questions? Bob Stark bob@kyriba.com @treasurybob Jeff Diorio jeff_diorio@treasurystrategies.com
  37. 37. 37© 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 37 Thanks for attending facebook.com/kyribacorp twitter.com/kyribacorp linkedin.com/company/kyriba-corporation youtube.com/kyribacorp slideshare.com/kyriba kyriba.com/blog
  38. 38. © 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 38  Treasury Strategies, a division of Novantas, Inc., is the leading treasury consulting firm. Armed with decades of experience, we’ve developed solutions and delivered insights on leading practices, treasury operations, technology, and risk management for hundreds of companies around the globe.  We serve corporate treasurers, their financial services providers and technology providers for the complete 360° view of of treasury. About Treasury Strategies www.youtube.com/c/treasurystrategiesincconsulting • Payments Strategy • RFP Support for Banking Services • Technology Business Requirements and Gap Analysis • Technology Selection, Implementation and Optimization • Treasury Change Management and Resource Support • Global Cash and Liquidity Management • Cash Forecasting • Financial Risk Management • Treasury Organization • Leading Practices Review and Benchmarking Connect With Us Solutions www.Treasurystrategies.com +1 312.443-0840 http://www.treasurystrategies.com/networking-communities

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