Leaping the Barriers to Perfect Cash Forecating

Jeff Diorio | Director| Treasury Strategies
Bob Stark | Vice President, Strategy | Kyriba
February 16th, 2017

© 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

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

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
-

 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

Why forecasting needs to be a priority

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…

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

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

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

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© 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

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

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

 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

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

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

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

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

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

 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

 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

*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

• 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

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

 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

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

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

– 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

Questions?
Bob Stark
bob@kyriba.com
@treasurybob
Jeff Diorio
jeff_diorio@treasurystrategies.com

37© 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 37
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Leaping the Barriers to Perfect Cash Forecating

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