Cash Forecasting: Make your Forecast More Accurate10/19/2015 | Greg Person
Topics for Discussion Why do we forecast
Questions to optimize cash forecast process
Path to success
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Why do we forecast? Ensure optimal liquidity to fund global business unit operations at the
appropriate level of risk and cost
Exposing & mobilizing idle pockets of cash
Improve P&L by reducing debt or increase investment balances
Execute corporate capital allocation strategy; share buyback, M&A, dividends
Visibility into FX exposures
Guidance to external investors; cash on my balance sheet vs. shareholder activism
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Key questions to optimize forecasting
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Be efficient with your valuable resources
Cash forecasting involves significant input, time and effort from across the organization
Clearly determine the decisions the cash flow forecast information will facilitate and benefits this will bring to the company
1. What am I solving for?
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Repeated mistakes lead to poor information and flawed business decisions
One certainty with any forecast is it will not be 100% accurate
Cash flow forecasting is an iterative process variance analysis and understanding the root causes responsible for forecast error is critical
2. Am I making the same forecasting mistakes?
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Lack of insight to corporate strategy will increase probability of material variances
Corporate Treasury should not operate in corporate silo
New product lines, M&A strategies and expand internationally, it will greatly impact the future cash flow needs and performance of the organization
3. Do I understand my business?
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Stop leaving money on the table and reduce interest expense
Increased interest expenses, opportunity risk, potential P&L impact
Optimize intercompany global cash liquidity
Internal cash is cheaper than external financing
4. Why fund your business with external funds?
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Two teams using two strategies to find the same number
Indirect method: FP&A
Direct method: Treasury
Aligning methods allows treasury opportunity to contribute at board level
Alignment also directs mgmt focus on treasury initiatives – e.g. FX hedging
5. Direct or indirect?
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Sleep peacefully at quarter-end
Real-time cash visibility and cash flow allocation automation creates certainty
“Will we hit our free cash flow target” is no longer a question; it is known
FCF targets are increasingly tied to executive compensation and public guidance provided to the investor community
6. Do have real-time insight?
Improving the Cash Forecast
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Path to Success
a) Collaboration – involving the right people
b) Consolidation – incorporating the right data streams
c) Measurement – feedback loop to measure and report on forecast accuracy…bank integration critical to success
Cash and Liquidity Forecast Dashboard
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Clear, accurate view of cash position, forecast and accuracy Global connectivity for real time transparency
Regional Input & Cash Flow Roll-up
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Simplistic user experience for global pariticpiation Flexible analysis views to answer ‘the next question’
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Liquidity Worksheet Chart and Table View
Review impact to borrowings, investments, and credit facilities
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Comparison of snapshots critical to measuring forecast accuracy (e.g. July 1 – Aug 31 as of Jul 1 vs. July 1 – Aug 31 bank actuals)
Forecast Accuracy – analyzing forecast variances
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Require summary views with drill down to cash flow details Important to have multiple comparisons
▪ e.g. Original budget plan vs. current forecast vs. hypothetical scenarios
Forecast Accuracy – analyzing forecast variances
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Just like Excel – adding comments is a good reminder to yourself or notes to others analyzing forecasts
Ideally, comments available at both summary level and when drilling down to level of detail
Forecast Accuracy – analyzing forecast variances
Aligning Direct to Indirect
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Align change in operating cash flow to Indirect FP&A method Provide intra-quarter guidance to CFO, CEO and Board
Questions?