Published : 10 years ago, on 20/08/2014

By Andrew Burns, Director of Kyriba UK, Kyriba

How often have treasury professionals wished for a crystal ball when trying to anticipate their company’s cash flows? Forecasting is potentially one of the hardest tasks undertaken by treasury teams, with its requirement for precision and accuracy and its ability to drive a company’s strategic growth, or hold it back if it all goes wrong! As one of the fundamental elements of the treasury function, more than 70 percent of treasury executives are involved in cash position reporting and forecasting – more than any other activity – and in many cases it can take up half of their time.[1]

Given that such a large number of hours are taken up with forecasting, you would think that treasury professionals would consider their forecasts to be reasonably accurate. A recent survey of 200 treasury and finance professionals looked into their confidence in their company’s cash forecasts. The results were worrying, to say the least. When asked “how accurate is your cash flow forecast?” the response breakdown was:

• Highly accurate (almost no variance): 0%
• Accurate (some variance, but not significant): 32%
• Somewhat accurate (some significant variances): 53%
• Very inaccurate (major variances): 8%
• Variances aren’t analysed: 8%

It’s worth noting that out of the professionals surveyed, not a single one believed that their cash flow forecast could be described as very accurate, while slightly less than a third see their cash flow as accurate. At the same time, six in 10 of the respondents felt that their cash flow forecasts have either “significant” or “major” inaccuracies.

Making their way through the dark

Andrew Burns

This lack of precision in forecasting can have a huge impact on companies, as an inability to gauge what cash they will need in the future often leads to building up expensive contingencies. For example, leaving cash to idle in poorly performing current accounts in the off-chance that it may be needed, or relying on expensive overdraft facilities. In addition, treasurers can find themselves falling into the following traps:

• Mismanaging liabilities – Without full visibility of liquidity, treasurers may continue to maintain expensive credit lines that could be paid down. As cash balances are obscured, there is no room to consolidate cash to reduce external debt – meaning the company may be borrowing at unfavourable rates due to its poor credit status.
• Restricting liquidity – Cash flow and liquidity are the fuel for a company’s growth and development. Without a clear understanding of future liquidity, a treasury team cannot advise on what cash may be available for commercial developments and strategic initiatives.
• Fearing the future – Inaccuracies in forecasting mean that treasurers have an unreliable and partial view of the company’s capital positions, hindering planning for the future. What this means is that capital cannot be optimized, for example with surplus cash invested to meet forecasted needs while touching maximum interest income. In addition, upcoming foreign exchange exposures are hidden and cannot be hedged against, presenting further risk to the company.

Let down by their tools

Many of the issues detailed above find their origin in poor data and flawed forecasting models. In some cases, treasurers are seeking to combine treasury forecasting with financial planning – two separate approaches that cannot be married satisfactorily. This is because financial or budgetary planning combines hard data taken from bank balances, accounts payable and accounts receivable date from the ERP system, with less precise data used for planning. While it may be of benefit for strategic planning, it does not provide the level of granular detail, such as precise timings, that is required by treasurers seeking to manage short-term liquidity.

In other cases, the data being used is not current, and therefore impacts the accuracy of the forecast. Treasurers must be able to update their forecasts on a real-time basis with relevant data from across the organisation, including invoicing, expenses and payments. Errors and omissions should also be tracked, resolved and noted quickly and efficiently, ensuring the forecast is consistently up to date.

Finally, a reliance on spreadsheet solutions that were not designed for extensive forecasting has led many companies into the path of errors. To avoid the danger of human error, as operators transfer data between internal systems, external banking and payments systems, and their spreadsheets, as well as the risk of catastrophic failure due to lack of system back-ups, treasury teams need to ensure that they are using solutions that are fit for purpose.

Light at the end of the tunnel

Overcoming the challenges of forecasting is not an impossible task. To do so requires the right solutions and the right approaches to be implemented. A fundamental requirement for a best practice forecasting programme is the ability to secure accurate and reliable real-time data from across the organisation. This necessitates a Treasury Management Solution (TMS) that not only contains the data but also has the processing capabilities to manage it. The TMS must be in real-time contact with all relevant elements of the organisation’s financial ecosystem, providing a communications hub, bureau services and connectivity to external banking partners.

As TMS technology evolves, it is increasingly meeting the needs of treasury professionals for effective cash forecasting tools. While crystal balls might prove more evocative, a new breed of TMS technologies are providing complete and robust snapshots of cash positions, real-time visibility of all payments and collections in process and combining this data with information on all payables and receivables held within an organisation’s ERP and accounting systems. The result is true best practice case forecasting, enabling treasury teams to provide strategic advice to their C-level suites and support their organisation’s growth.

[1] http://www.kyriba.com/sites/default/files/content/kyriba-act_survey_2014.pdf