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As part of our continuing series discussing how different time horizons can be used in cash forecasting, this post will explore the daily cash flow forecast in detail.

In this post we will review:

• The uses of a daily cash flow forecast
• Why companies set up a daily cash flow forecast
• How to build a daily cash forecast:
  • The sources of data that feed a daily cash forecast
  • What a daily cash flow forecast looks like
  • The workflows around a daily cash flow process
• How to decide whether a daily cash forecast is right for your company
• How software can improve a daily cash forecast

What are the main uses of a daily cash flow forecast?

The main use of a daily cash forecast is short-term liquidity planning. The level of granularity produced as part of a daily cash flow forecasting process means that it can offer vastly improved financial control. This can be very useful for businesses operating on fine margins, or those working to tight working capital cycles.

The level of granularity afforded by a daily cash forecast also enables the kind of detailed guidance often required by shareholders or other investors. In addition, the level of data sourced from finance systems reduces the risk of human error.

As opposed to longer time horizons, a daily cash forecast allows greater levels of cash visibility. This means that, on a look-through basis, daily bank positions can be seen at an entity/business unit/departmental level. Each of these entities/business units can also have their respective cash positions forecasted as part of the overall daily cash forecasting process.

Generally, because of its shorter time-horizon, a daily cash forecast has a high degree of accuracy. It is this combination of increased accuracy and greater detail (when compared with other time horizons), that enables a much more proactive and tactical planning processes for short-term liquidity.

Why companies set up a daily cash flow forecast

The catalyst behind the decision to switch to a daily cash forecasting process can come from internal or external drivers.

External

• New credit agreement. A new credit agreement may include a covenant that stipulates that the total net cash position maintained by the group doesn’t go overdrawn.
• Revolving credit line. Making the switch to a revolver (maintaining an open credit line in return for monthly payments) as a funding mechanism usually results in a greater focus on daily cash planning and forecasting to assist with loan drawdown and repayment decision making.

Internal

• Excessive administration. Longer term forecasts are sometimes heavily reliant on human sources, whereas daily cash forecasts pull most (or all) of their data from system sources. This can result in a notable decrease in the levels of administration involved (particularly when specialist software is used, more on that below).
• Delays in longer term forecasts. The amount of time taken to produce forecasts with a longer time horizon may be affecting the senior management team’s ability to make timely tactical cash management decisions.
• Lack of visibility. If head office doesn’t have adequate visibility into all group accounts, a daily cash forecast may be requested to gain insight into all accounts across the group.

How to build a daily cash flow forecast

As is true when setting up any new cash flow forecasting process, it is important to begin by setting business objectives. To ensure that a daily cash forecast is the appropriate time horizon, these business objectives should map to the uses of a daily cash flow forecast outlined at the start of this article.

Sources of data that feed a daily cashflow forecast

The predominant difference between the sources of data used for a daily cashflow forecast versus longer-term time horizons is the amount of system data. Whereas longer-term forecasts (such as a 13-week cash flow forecast) are heavily reliant on human involvement, a daily cash forecast principally sources its data from system sources. Namely these are:

• ERP systems
• AP / AR ledgers
• Bank files (e.g. MT940 or BAI2)
• Payroll systems
• Billing systems
• Subsidiary data sources (e.g. CRM systems)

To expedite the forecasting process, all of these systems can interface directly with specialist forecasting tools (this is discussed in further detail in the section on software below).

What does a daily cash flow forecast look like?

As with all types of cash and liquidity forecast, a daily cashflow forecast presents a high-level consolidated view of all of the data that was fed into the process. Therefore, the forecast is usually composed of (but not limited to): customer receipts, intercompany flows, investing data, and capital expenditure.

The above is a screenshot example of a daily cash forecast, showing forecast and actual figures (000s).

Because those choosing to set up a daily cash forecasting process do so because of the level of detail it provides, the base cash flow (line items) are quite often captured at a granular level. In other words, the individual line items showing customers’ and suppliers’ details displayed on a daily cash forecast would generally go into greater detail than they would on a longer-term forecast. In addition, bank account positions would generally be captured on a per account basis, and aggregated to a consolidated view.

As you would suspect, the main visual difference with a daily cash forecast is that the units of time captured are days. Typically, this view would extend two to four weeks into the future, although it is not uncommon that companies might extend this further. However, if a longer view is required (for example, if it is needed to extend beyond six to eight weeks), a longer-term time horizon might be more appropriate for the business requirements.

Workflows around a daily cash flow forecasting process

Many of the workflows that support a daily cash forecasting process are the same as those that support longer-term forecasting. However, the principal difference with daily cash forecasting is the frequency with which these workflows run.

Generally, a daily cash flow process means that data will be updated on a daily (although sometimes weekly) basis. The cycle is usually controlled by head office, that is to say the underlying entities each align with the requirements set by head office.

For large, multinational companies, this often means that data is updated multiple times in a 24-hour period. Depending on the business, is this is sometimes completed on a “follow the sun” basis, whereby each business unit updates the data during its own working hours.

It is important to note that, for larger companies, global business units are often running on multiple ERP systems with multiple bank partners. This means that the software systems used to support the workflow must be able to cater to this need.

How to decide whether a daily cash forecast is right for your company

Start with the objectives

It is important to consider the objectives of the cash forecast when assessing which time horizon will be best. If considering a daily forecasting process, it is important to confirm that those objectives map to the uses outlined at the beginning of this article.

An outline of model structure examples (taken from our cash flow forecasting setup guide) can be seen below:

If a longer time horizon is being considered, you may wish to view our article on the benefits and uses of a 13-week cash forecast.

The benefits of software

All cash forecasting processes can be improved with the use of specialist cash flow forecasting software, however a daily cash forecast in particular benefits from integrating a software solution.

To illustrate, let’s review the elements of a daily cash forecasting process discussed in this article and address the practical ways software improves the process:

Automated system data upload

As mentioned earlier in this article, one of the unique features of the daily cash forecast is that data is sourced principally from systems. The use of software means that the extraction of all of this data can be automated. (This point is examined in further detail in this post on cash forecasting automation.)

Automating this data upload process also means that the frequency of refresh required becomes a non-issue.

Enhanced analytic insight

In addition to the decrease in the administration required at the front end of the process, software can greatly improve the analytical capabilities when reviewing the data produced.

As we discussed in an article on cash forecasting data visualisations, the way software can present data graphically greatly enhances the ability to highlight trends, identify anomalies, and uncover insights that will be missed when simply reading through raw data.

Increased visibility

If the head office finance or treasury team is struggling to gain visibility into the cash positions of the underlying entities, software can enable real-time views of all bank accounts on a consolidated basis (as well as on a granular level, where drilldown is required).

Process workflow management

Automating the workflows that support the daily cash forecasting process can also alleviate much of the administrative burden placed on head office finance and treasury teams. For example, automated reporting workflows mean that scheduled reporting emails to relevant stakeholders can be generated and sent directly from the system as new forecasts are produced.

About CashAnalytics

CashAnalytics has helped many companies across a broad range of industries to build and maintain best-in-class cash forecasting processes that produce the highest quality reporting and analytics outputs.

If you would like to see a demonstration of how software and automation can improve your cash forecasting processes, or would like to see the business case for introducing CashAnalytics to your company, please contact us directly.

Cash flow forecasting is a vital process to understand the working capital of a business. However, for many large, multinational organisations, the process can be daunting and the end product can be frustratingly low quality. This needn’t be the case. Below, we review a few of the key challenges of cash forecasting and provide workable solutions for how to overcome them.

While challenges such as forecasting unexpected expenditure, capturing unpredictable flows and modelling external influences are common to most companies, large multi-location companies who operate a centralised process encounter a range of other forecasting challenges. From our experience in helping large organisations automate their cash and liquidity forecasting processes we have broken these challenges into five broad categories:

• Education
• Process buy-in and continuous engagement
• Manual administration
• Reporting and analysis
• Other challenges (intercompany etc.)

1) Education

Cash flow forecasting is a process that is heavily reliant on the input of many people across an organisation. These can include cash managers in head office, financial controllers in business units and subsidiaries, and a range of others. The reporting output is therefore dependent on the knowledge of the people contributing to the process. A high-quality output is supported by all personnel accurately inputting the data for each of the cash flows over which they have responsibility.

Time spent educating or training the various personnel involved in the process can help avoid the “rubbish in, rubbish out” problem encountered when there is a knowledge gap.

To improve the knowledge and awareness of the personnel involved in the process, we have seen the following methods make a significant impact:

• In-depth review – In advance of implementing a forecasting process, a review of a company’s historic cash flows can provide a significant amount of insight into the nature of key cash movements, such as receipts from customers and payments to suppliers. Documenting and understanding these flows can provide a solid basis for making future cash flow projections.
• Continuous feedback loop – After the update of actual data flows, ideally the process should incorporate a feedback mechanism to inform users how accurate they have been. As further forecast versions are rolled out this feedback loop continuously drives improvements in data quality.

2) Process Buy-in and Continuous Engagement

Getting buy-in from key personnel helps to overcome many of challenges of cash forecasting. When the process relies on contributions from subsidiaries, business units and other head office departments, ensuring continuous engagement with the process can be challenging. From an operational perspective, this problem usually manifests itself in late or missed reporting deadlines and inaccurate forecast information. This, in turn, increases the workload of the head office function managing the process.

Strategies employed to increase meaningful engagement with a forecasting process include:

• Executive sponsorship – Sponsorship of a cash flow forecasting process by senior management such as the CFO or Finance Director is a critical factor in ensuring the efficient operation of the overall process. Generally, the requirement for a forecasting process will be driven at executive/board level but subsidiaries and process contributors should be made aware of its importance in the eyes of senior management.
• Provide value to contributors – Business units sometimes view the cash flow forecasting process as a black hole of information. There can sometimes be the perception that a significant amount of time is spent compiling and reporting information, but minimal value is obtained at a business unit level. Finding ways to ensure that all contributors obtain value from the forecasting process has shown to improve its overall effectiveness and efficiency.

3) Manual Administration

A multiple currency cash flow forecasting process involving numerous business units and subsidiaries, managed using spreadsheets, can result in significant amounts of manual administration. This manual workload typically centres on the consolidation of spread sheets containing cash flow information, error checking the final reporting output and troubleshooting problems such as intercompany mismatches.

Aside from the administrative workload posed by the process, the amount of manual intervention required to produce a reporting output can compromise the integrity of the output itself due to a lack of process control and audit capabilities.

4) Reporting and Analysis

Current methods employed by companies to manage forecasting processes are heavily focused on administrative tasks and generally offer limited reporting and analysis options.

Improvements in the below areas can have the greatest impact:

• Actual versus forecast analysis – This type of analysis is seen as a key factor in developing an understanding of cash movements. This, in turn, contributes to the knowledge base of the personnel involved in the process.
• Forecast versus forecast analysis – Arguably more important than actual versus forecast analysis, forecast versus forecast analysis can give management an early warning signal with regards to expected changes in future cash position.
• Historical trend versus forecast analysis – Comparing historical trends to projected future cash movements can provide the most intuitive sense-check of the forecast information being reported, while also giving a very quick insight into potential problems.

These types of analysis are greatly aided with the use of various data visualisation techniques, which we discuss in further detail in this post on cash forecasting data visualisations.

5) Other Challenges

A number of other challenges, primarily relating to technical components of a forecasting process, can also provide obstacles in the way of high-quality forecasting. In some cases these challenges are caused by industry or company specific issues. While we don’t have time to review each of these here, please feel free to contact us directly for advice pertaining to your precise circumstances. At a more general level, the two challenges are felt by a wide range of companies:

• Intercompany reconciliation – Reconciling forecast cash movements between intercompany entities can prove particularly problematic for high volume trading companies, such as those engaged in manufacturing activities. In extreme cases, the problem can render the entire forecasting process meaningless. However, more commonly, it requires significant reconciliation efforts and causes administration headaches.
• Linking long and short-term forecasts – Most large organisations maintain at least two cash flow forecasts – a short term forecast (three months or less, split weekly) for day to day planning purposes and a long-term forecast (12 months plus, split monthly) for strategic and long-term planning purposes. Depending on their current processes, this can make it extremely difficult to link short and long-term forecasts, which presents numerous administration and reconciliation problems.

Overcoming challenges with software

All of the challenges listed above can be overcome by building a good cash forecasting process, facilitated and managed through the use of specialised cash forecasting software. CashAnalytics has helped a range of companies across many industries to build and maintain best-in-class cash forecasting processes that produce the highest quality reporting and analytics outputs. If you would like to see a demonstration of how automation can overcome these obstacles, please click the “schedule demo” button in the top right corner.

To assist those considering setting up a new process we have written this guide, which outlines how the process can be built and rolled out within six weeks. The guide is based on our experience with a wide variety of clients. However, if you have any questions that relate to your precise circumstances, please do not hesitate to contact us now.

In the approach to the final quarter of the year, all eyes will turn towards forecasting year-end financials. Depending on the company’s corporate debt levels, year-end covenant forecasting might be a particular point of focus.

By the end of Q3, senior management including CFOs, financial controllers, and treasurers will have a will have a good handle on the income and expense side of the business. Of course for cyclical businesses, whose busiest time may fall in the last quarter of the year, such as retailers in the run up to Christmas, this isn’t true. For them the year can be won or lost in the last month. However, for most businesses, forecasting full year profit and loss should be reasonably straightforward coming into the final quarter.

Forecasting balance sheet numbers into year end can be a far more challenging task as they are a snapshot at a point in time. As a result, they are subject to more volatility as the key date approaches. Balance sheet forecasting is an important task in its own right, but becomes doubly important when key components feed external debt covenant calculations.

Covenant forecasting in focus across the board

Banks and other lenders use covenants as a key measure of risk and closely monitor the covenants of the companies they have lent to, on an ongoing basis. Lenders aren’t the only market participants interested in corporate covenants.  Rating agencies such as S&P and Moody’s very closely monitor covenant levels for breaches, which in some cases trigger defaults, but also show deterioration which can lead to credit downgrades for rated businesses.

Due to the impact a covenant breach can have on a company, they are also very closely watched by equity markets and anyone who owns shares in a highly leveraged business. As mentioned, a covenant breach can trigger a default which, in many cases, hands control of a business over to its lenders, wiping out most or all equity. While this is a worst-case scenario, based on the currently elevated levels of corporate debt, a movement upwards in interest rates above expected levels or tightening credit conditions could lead to a sharp increase in covenant breaches and defaults.

Covenant forecasting data sources

CFOs, Controllers and Treasurers will be crystal clear on the covenants and related levels they must comply with. However, accurately forecasting these levels approaching a key reporting date, such as year-end, can be a fraught and challenging process. This is due to two factors:

1. Gathering all of the data on an ongoing basis to compile the forecast, and
2. The difficulty in accurately forecasting certain balance sheet numbers, such as a year end cash.

In a large organisation, unless they are using dedicated cash forecasting software, it’s unlikely that the person or team forecasting the future covenants will have all of the required information readily available. For example, looking at two of the most common debt covenants, the leverage ratio (Net Debt/ EBITDA) and the interest covenant ratio (EBITDA/ Interest Expense) we can quickly see the number of inputs that are required and where they need to be sourced from. The process is further complicated by the need to sometimes capture forecast and actual data from different people and teams. The table below outlines the required inputs to these covenants and their sources.

Of course, this tables ignores the many people who are involved in creating these headline numbers, which in large companies is a lot of people. It also ignores any adjustments that need to be made to the figures before inclusion in the covenant calculation. For example, an adjusted measure of EBITDA is often defined by a bank for use in the calculation, which removes some business activity if it distorts the true underlying measure of cash generation. When these factors are considered, the task of covenant forecasting becomes increasingly challenging.

Preparing for key reporting dates

Often responsibility for forecasting covenants falls to the Treasurer or Financial Controller. Their teams gather and compile this information and guide all necessary parties as the key date approaches. The focus on these numbers and the frequency of refresh required will be like no other time in the year, and therefore preparations will need to be made to ensure the increased demand can be met. In the run-up, they will need to:

1. Open up lines of communication as early as possible with everyone on whom there is a data dependency.
2. Clearly communicate to everyone involved in the process the importance of the numbers and what they ultimately feed into – debt covenants for external lenders.
3. Prepare everyone for more frequent data refreshes as year end approaches. For the couple of weeks before year end, a daily refresh (at minimum) is likely.
4. Try to build an understanding of other data and process dependencies and use these to manage expectations accordingly.

Ideally, covenant reporting forecasting should be part of weekly or monthly management reporting. If this is the case, the impact of the year end process should be lower and lines of communication already open.

Tips for forecasting the biggest variable – cash

The year end cash number will be the biggest variable in the covenant calculation. In the final month before year-end, earnings and debt numbers should be reasonably under control. Cash, on the other hand, can be hard to pin down until the last moment. This is because there are so many inputs into the overall cash figure.

1: What are cash levels right now?

The best place to start is to confirm the exact cash number as it stands now. A large, multinational organisation will have a vast number of accounts spread across the globe. The only way to be able to achieve a consolidated view of the overall “live” cash figure is with specialised bank and liquidity reporting software. This will enable a view that includes all banking data in one place, pulled automatically from a multitude of sources (including MT940 or BAI2 files).

2: Gain executive sponsorship

Because of the number of business units (subsidiaries, global network companies, other departments, etc.) and number of people that are needed to produce data for accurate covenant forecasting, executive sponsorship is key. If senior management issue a communication to all relevant personnel outlining the reasons they are being asked to contribute data to the process, they are far more likely to produce high-quality data within the stated deadlines.

3: Leverage analytical tools to understand how cash is trending

Understanding how cash is currently trending can help build a picture of where it is likely to arrive at year-end. This means comparing and measuring movements, rather than just looking at snapshots in time. How cash has trended historically can also help to complete this picture. While past cash movements aren’t necessarily indicative of future positions, if cyclical trends are identified they can help increase the accuracy of year-end forecasts. The most effective way to identify trends in cash movements is with specialised analytics software tools.

About CashAnalytics

As a specialised liquidity forecasting and analytics software, CashAnalytics are dedicated to helping large, multinational organisations better understand the current and future cash and liquidity positions. To see how this would work for your company, contact us now to arrange a demo.

Sometimes the simplest tasks can be made problematic by the most obscure hurdles. This is particularly true for data management.

Imagine a Database Administrator is charged with sorting a range of historic texts by estimated publishing date. Let’s imagine these texts have estimated publication dates ranging from the early 18^th century to the mid 20^th, and that the headline information (including dates) for these texts are all stored in Excel. At first, you might assume this would simply require selecting the column containing the dates, and sorting by time.

However, in Excel the world began on the 1^st January 1900 and is due to end on the 31^st December 9999. After researching how to overcome this problem, the Database Administrator has installed a handy plugin that captures pre-1900 dates. Then the next hurdle presents itself, the eleven “lost days” between 2-14 September 1752. (Which arose from the Julian to Gregorian calendar switch.) By now the “simple task” has revealed itself to have far more steps than originally estimated.

The value in data

A good data set is a large data set. Large data sets, however, come with increased complexities. As we saw with the example above, even fairly simple data sets can throw up difficulties. The larger the volume of data, the harder these problems are to unpick. The main issue with large data sets, though, is the increased likelihood of anomalies.

In short, the larger the data set becomes, the more difficult it becomes to work with. This catch-22 has led to increased investment in the field of data cleansing. A task that is necessary before any data mining activities, which is where the real value-add is found, can take place.

The data sets that are used in a cash forecasting process are no different. Just like all other forms of data analysis, cash forecasts suffer the same decreased output quality if the data integrity is compromised.

Key cash flow data sources

In the field of cash forecasting, having a clean set of historic data is enormously powerful as it forms a baseline from which accurate forecasts can be made. The data sources that feed into a cash forecasting process can be broadly broken into two categories, sources of actual data, and sources of forecast data.

In most cases the actual cash flow data is sourced from:

• Enterprise Resource Planning (ERP) / Accounts systems
• Bank file downloads (BAI2 or MT940 files)

Whereas forecast cash flow data is usually sourced from:

• ERP systems
• Treasury Management Systems (TMS)
• Data modelling software
• People (individual business units)

The extraction of this data can either be automated, through the use of specialised cash flow forecasting tools, or it can be drawn manually. Because of the range of data sources that input into the process, it is important that the data is standardised into a common format before it is used. A common cause of data defects is that incorrect information has been input, possibly due to human error (if the process is manual).

As previously stated, this standardisation step can be an automated part of the process, but it is important that input feeds are mapped carefully, by someone with the appropriate expertise, to ensure the correct fields are captured.

What to watch out for

Ultimately, the goal of cleaning a historical cash flow data set is to create to a representative view of what’s happened in the past, which in turn provides a reliable basis for building a view of the future. Key to this exercise is removing items and once off cash flows that will not be repeated in the future as they will ultimately pollute the modelled forecast output.

Things to watch out for when cleaning a cash flow data source include:

Accounting Journals

Any information exported from an ERP or accounting system could potentially contain accounting journals such as reversals or currency adjustments that will impact the quality of the underlying data that will be used for forecasting. These journals don’t represent underlying business activity and will need to be removed.

Acquisitions & Divestures

Acquisitions are likely to be the biggest cash out flow, or series of cash flows, leaving a business over the course of year. It’s highly unlikely that the amount spent and timing of an acquisition will be repeated in the future and therefore it will be necessary to remove these cash flows before using the data set for forecasting purposes. The same is true for divestures.

Investment Capital Expenditure

Aside from acquisitions, investment capital expenditure, particularly for spend on large once off projects, can be the lumpiest cash out flows over a period of time. Even if capital expenditure levels are expected to remain consistent with previous periods, the amount and timing of this expenditure will likely be very different to previous periods. Which in turn warrants their removal from the data set.

Debt Movements

Debt drawdowns, repayments and refinancing can have a huge impact on total cash movements over a period of time. Typically, these movements aren’t representative of day-to-day business activity and should be removed when using the data set to model future activity.

Intercompany

In most mid to large size companies intercompany cash flows between business units can sometimes equal external cash flows in total volume over a period of time. Of course, intercompany shouldn’t have an impact on net liquidity but when analysing a particular business unit or segment it is important to remove non-trading intercompany movements that are unlikely to be repeated in the future.

General Outliers

In the regular course of business unusually large cash movements, be they payments or receipts, will occur for a number of reasons. The winning of a large new customer account could lead to a once off large cash receipt, for example, or the prepayment for raw materials to secure a discount could lead to large once off payment. The removal of these types of cash movements may require a little more judgement than the previous items but, in some cases, data is improved when they are removed.

Data cleaning – a continuous process

Owing to the anomalies listed above, data sets often undergo a “cleaning” exercise before any in-depth analysis is performed. However, as noted, care must be taken not to conflate data anomalies with data defects. While it goes without saying that removing data defects improves data quality, callously removing all anomalies might mean removing some important signals from the data.

In cash forecasting, data cleansing is a continuous process. The various measures that a large organisation must take, such as those listed above, mean that there are regularly factors that cause sizable distortions to these data sets.

Maintenance made easier

Specialised software simplifies the continuous data cleaning process, along with all other elements of the cash forecasting process. As referenced in the section on data sources above, automating the process expedites data cleaning. Elements such as intercompany cash flows should always net to zero. However, with a manual process this balancing task can be hugely time-consuming and inaccurate. Specialised software, with a dedicated counterparty driven intercompany tool, simplifies this task to a touch-of-a-button exercise.

This simplification enables the person analysing the data to quickly review and amend outputs and therefore take the right anomalies into consideration.

Having the right personnel at the right stage of the process

As we discussed in a recent article on the analytics skills gap, it is important to have people with the right skills at the right stages of the process. While not an absolute requirement, some companies may choose to recruit a Database Administrator (DBA) to ensure that all data is formatted and structured properly as it goes into the model.

In any event, the person charged with managing the database should be familiar working with large data sets and have a good knowledge of database theory and database design. This expertise will help with the identification and rectification of defects in the data, as well as managing the integrity and security of the data as a whole.

Progression through iteration

Once all checks have been made, appropriate actions have been taken, and everybody is confident that the data is of sufficient quality and integrity, it can be loaded into the forecasting model. The focus now switches to the output side of the process, i.e. on the reporting, forecasting, and analytics. Here, quality is improved through a process of careful measurement and adjustment. A gradual process, but one that becomes increasingly valuable to the company as these improvements are made.

Help for Corporate Treasurers

Going back to our hypothetical Database Administrator, struggling to sort historical dates in Excel, their best option is to re-format the database. They’ll need to sort their dates into separate columns; one containing year, another for month, another for day. Then filter with a cascading sort, factoring in all three columns.

For Corporate Treasurers, however, we can be of far greater assistance. We provide dedicated cash flow forecasting software to large, multinational organisations and have extensive experience helping clients across a range of industries.

In addition, to assist those considering updating their old processes, we have written a whitepaper which outlines the steps involved in setting up a cash forecasting process. If you have any questions on this, or would like to see a demo of our software in action, please do not hesitate to contact us.

A well-designed cash flow forecasting template can dramatically improve the quality of reporting outputs. However, this is not a one-size-fits-all situation. For a template to be well designed it must be tailored to align with the business objectives of the cash forecasting process.

As one of the key stages in setting up a cash flow forecasting process, treasury teams often spend considerable time working out how their forecasting template should be designed. To assist, we have written this post which outlines how a cashflow forecasting template should be designed. In this post we will outline: what a cash forecasting template consists of, key decisions that need to be made when in the design process, as well as providing some useful tips.

What is a cash forecasting template?

A forecasting template (also known as a cash forecasting model) is the reporting structure and associated logic that produces the required forecast output. A forecast template has two dimensions and typically collects two types of cash flow data.

The two dimensions of a forecasting template are:

1. Reporting periods split on a daily, weekly or monthly basis to certain points in the future.
2. Cashflow classifications which group cash flows typically on a “management reporting” level of detail.

The two types of cash flow data in the template are:

1. Actual data. In the graphic above this is displayed in the column furthest left.
2. Forecast data. In the graphic above this is displayed in the columns on the right.

What is the right level of granularity for the cash forecasting template?

The level of granularity chosen for both the reporting periods and cashflow classifications will be determined by the overall objectives of the forecasting process.

For example, if the business objective is short term liquidity planning, the template will need will need a reporting granularity of at least daily. If the reporting periods are any broader than this, for example if reporting periods are presented weekly, short-term liquidity shortfalls may be missed.

These are important considerations as reporting granularity that is too fine can muddy the waters and disguise important trends in the data. Conversely, cashflow classifications or reporting periods that are too broad for the objectives might mean that precise but important signals are missed.

In addition, to support decision making in liquidity planning, the forecast will also need to be as accurate as possible. As forecast accuracy generally decreases the further into the future the forecast stretches, the forecast horizon will need to be relatively short. In our experience forecasts used for short term liquidity planning do not usually exceed a horizon of 10 business days.

How to choose the right forecast horizon

To assist those currently making decisions on which is the appropriate time horizon for their objectives, we are in the process of releasing a short series of articles on the subject. The first reviews the practical uses for the 13-week cash flow forecast.

Model structure examples

The table below outlines some examples of illustrative business objectives. It includes which forecast horizon, reporting date granularity, cashflow classifications, and frequency of creation would be appropriate for each.

While the above examples are illustrative, ultimately, the structure of the template chosen should be able produce the range of reporting outputs needed to meet the business objectives.

How much actual data should be included in the cash flow forecasting template?

Capturing actual cash flow and balance data as part of the overall forecast reporting process is also an important consideration.

Similar to the granularity decisions, how much actual data should be included will be decided by the business objectives. Actual cash data allows the forecast model to produce both trend and variance analysis which are very useful pieces of supplementary analysis to the base forecast.

As business objectives help to define the scope of the various different elements of the cash forecasting template, having clearly defined business objectives is the first step in designing a forecasting template.

Setting up a cash forecasting process

This post is an extract from the guide we recently produced which covers all aspects involved in setting up a cash flow forecasting process. Please follow this link to the cashflow forecasting setup guide, which we welcome you to download. The guide discusses: what is involved in setting business objectives, how to set the process up, as well as what comes after go-live.

Data visualisation is an important step in any form of data analysis. Presenting data in a graphical format often helps to highlight trends, identify anomalies, and uncover insights that will be missed when simply reading through raw data. The same is true when analysing the data produced as part of a cash forecasting process.

To illustrate how data visualisation can help with data analysis, this post will review three potential ways to visualise cash forecast data. These three options are;

• Cash Walk Through Visualisation (shows how cash moves from an opening position to a closing position)
• Forecast Versus Actual Visualisation (quickly understand forecast variances)
• Time Series Visualisation (analyse accuracy across multiple versions of a forecast)

However, it is important to note that these examples are not exhaustive, and that many other formats of visualising cash forecasting data are available.

Cash Walk Through Graph

A cash walk through visualisation breaks the journey from opening cash balance to closing cash balance into a series of steps that identify the most significant contributors/detractors to the net cash balance.

In the example below, we can see the three headline cash inflow categories highlighted in yellow (Customer Receipts, Investing Inflow, Dividend Receipts). The four headline outflow categories are highlighted in green (Supplier Payments, Tax, Payroll, Debt Payments).

One of the key benefits of this method of data visualisation is that it highlights the extent to which each category of cash flow affects the cash balance in an easy to understand visual. This means attention can be focused on the element(s) that will have the greatest impact. For example, in the graph above we can quickly see that supplier payments (which total $10million in outgoings) cancel out the positive contributions from customer receipts, investing inflow, and dividend receipts combined.

Forecast vs Actual Variance Visualisation

The graph below visualises a comparison of forecast versus actual data for a variety of reporting entities. It breaks the measure into two categories, percentage variance and amount variance. (Here, the different reporting entities’ variances are transposed to a common currency, US dollars).

One of the key benefits of this method of data visualisation is that it allows material variances to be quickly identified and put into context with other entities’ percentage accuracy. This means that attention can be paid to the variations that have the greatest impact. For example, in the instance above, Brazil had a major deviation between forecast and actual (92%) but this only equated to a variance amount of £1.3million. Whereas in China, where forecast accuracy was better (though still poor as China had an 83% divergence from the actuals), the value of this discrepancy  was $4.0million. This means that an increase in the accuracy of forecasts produced by the Chinese entity (where there is considerable scope for improvement) would have a far greater impact on overall, company-wide forecast accuracy than focusing on the most inaccurate forecasting entity.

Time Series Visualisation

A Time Series Visualisation allows variance analysis to be carried out across multiple forecast versions and it is usually best displayed in a table such as the one below.

Here, the table shows how multiple forecast versions compare to the actual data (in bold):

• y axis: shows versions of the forecast (when they were produced)
• x axis: shows the month each forecast is projecting the closing balance of
• Each data point on the chart corresponds to a forecast or actual (actuals are in bold) closing cash position
• Taking the Feb-18 forecast version as an example, scanning along the row we can see that this submission captured the actual closing balance for JAN 2018, and forecast closing balances for FEB – JUNE 2018.

The advantage of capturing the data in this format is that enables easy comparison of multiple forecast versions. This means that trends in the data can be easily identified and therefore addressed to improve accuracy.

For example, the table above shows that while forecast accuracy broadly improved as the forecast horizon reduced, there remained a tendency to underestimate the actuals. If we review the submission made in Apr-18, we can see that the actual captured for the March 2018 closing balance was 154,000. Included in this submission were forecasts for the April 2018 closing balance (which it underestimated by 19,000), a forecast for May 2018 (underestimated by 100,000) and a forecast for June 2018 (underestimated by 134,000). As there is enough data captured (in the table we can see 36 forecasts and six closing balances) it can by hypothesised that this is not a natural variance but rather a trend that is the result of a fundamental area of the forecast being miscalculated. This might be higher than expected sales volumes, lower overheads, perhaps a recent reduction in business rates was secured by the company but this wasn’t reflected in forecast calculations, for example. In any case, once this trend is identified its underlying cause can be investigated, identified, then corrected. Thereby improving forecast accuracy.

Benefits of data visualisation

As mentioned at the beginning of this post, data visualisation is a necessary part of any data analysis. Presenting the information graphically enables an analyst to quickly spot trends, identify anomalies, and helps to uncover the underlying causes of any flaws in the process. For a treasury team, this means that these insights can then be presented back to the business in a clear and concise format for easy interpretation by senior management. This therefore positions treasury as a strategic department within the business.

Data visualisation software and tools

As with all parts of a cash and liquidity forecasting process, data visualisation options can be greatly improved with the use of specialised software tools. We have helped many companies to automate their cash forecasting processes, to increase forecast accuracy, and set up a new cash forecasting process altogether. If you are looking to improve the impact of cash forecasting in your organisation, contact us to see a demo of our specialised software.

The CashAnalytics Summary Series takes major Central Banks’ extensive reports (often well over 150 pages), and summarises them into five minute reads.

This release summarises the 5th edition of the ECB Economic Bulletin for 2018, which was released on the 9th August.

The key points covered in the report include:

• The euro area economy is proceeding along a solid and broad-based growth path.
• Key ECB interest rates were unchanged and are expected to remain at present levels through the summer of 2019.
• Net asset purchases are to continue at €30 billion per month until the end of September 2018. After which, subject to incoming data, monthly purchases will reduce to €15 billion until the end of December 2018 and then end.
• The Governing Council intends to maintain its policy of reinvesting the principal payments from maturing securities for an extended period after the end of the APP.

To read the summary of the ECB Economic Bulletin, please click here.

When setting up a new cash flow forecasting process, it is vital to select the right time horizon. This article will form part of a series we are producing which discusses how various different time horizons can be used in cash forecasting. This post will explore the 13 week cash flow forecast in detail.

Selecting the right time horizon for a forecast depends very much on the business objectives of the forecast. By exploring the uses, benefits and drawbacks of the 13 week cash flow model, you should be able to ascertain whether it is suitable for your business needs.

Uses of a 13 week cash flow model

We chose to start this series of articles with the 13-week cash flow model because of its broad uses. Corporate senior management, including the CFO, are familiar with 13-week forecasts as they will use them in various forms of quarterly strategy and planning sessions. Similarly, investors often prefer the 13-week horizon as it gives them a reasonable view of the health of the company in which they are invested. The same holds true if a company finds itself in a distressed situation. In this instance a 13-week cash forecast should be able to identify when and how any potential liquidity shortfalls should hit a company. This therefore offers the ability to prepare for, if not rectify, any issues before they occur. A 13-week cash forecast is also often a requirement for bank reporting, or when submitting any lending requests. In short, while a 13-week cash flow forecast isn’t suitable for all requirements, it does have a broad range of applications. We will discuss these in further detail below.

Advantages of a 13 week cash flow forecast

Striking a balance

The time horizon of the 13-week cashflow model is short enough to support agile, tactical decision making, but also takes a long enough view to drive longer term decisions. The 13-week cash flow forecast also helps strike a balance between accuracy and range. It is a universal truth in forecasting that the accuracy of a forecast degrades the further it extends into the future. 13 weeks provides enough sight to have an impact on strategic decision making, while remaining short-term enough to be able to provide a high degree of accuracy.

Planning for the medium-term without interrupting plans for the longer term

13 weeks of visibility allows a CFO, treasurer, or financial controller to make medium-term cash management plans. This could include debt drawdowns and repayments, short term investments, or other management decisions.

Taking a longer-term view, while 13 weeks is sufficient for medium term and month-to-month cash planning, it won’t overlap with longer-term plans which can extend years into the future. Because of this, there is little reconciliation required between plans. Medium and short-term planning decisions can be assisted by the 13-week forecast, whereas longer term planning remains in the purview of the overall business planning process.

Avoiding the short-term planning gap

Most planning processes in companies produce monthly forecasts and budgets, offering limited short-term visibility. A 13-week cash flow forecasting process is usually broken down into weekly reporting periods, therefore offering four times greater granularity. This means that any short-term planning shortfalls can be addressed with a detailed look-through.

Liquidity risk forecasting

Risk management is a key part of any cash forecasting process. Forecasting with a 13-week horizon should be accurate enough to identify any potential liquidity issues, while still offering enough time to take action to resolve those issues. For example, if a potential liquidity shortfall is identified with 10 weeks’ notice, the treasury team have ample time to prepare by arranging bank funding or reviewing intercompany lending options.

Matching business requirements

By covering a full quarter in scope, a weekly rolling 13-week cash flow forecast will always provide cash balance visibility on the next key reporting date or next quarter end. This is extremely valuable for the business, as senior management will always want reporting on cash balances that coordinate with their own key reporting dates.

Suitable for banks and investors

Depending on the ownership structure, debts, bank relationships, or investment status, a company may be compelled to produce a liquidity forecast with at least 13 weeks duration in place. It’s a key measure of good financial control and, from a bank’s or investor’s perspective, it provides clear visibility of the company’s working capital.

When is a 13-week cash flow forecast not suitable?

Short term liquidity planning

A shorter forecast horizon (perhaps of 10 business days) might be better suited if the business objectives are focused more closely on short-term liquidity planning. A shorter-term forecast could have a daily reporting granularity and therefore be able to report on high-level flows and balances with a high degree of accuracy at a more precise date in the very near term.

Longer term liquidity risk management

While medium term liquidity issues can be identified and actioned with a 13-week forecast horizon, a 6-month forecast horizon (broken into weekly for 13 weeks and then monthly for the following 3 months) might be better at flagging up longer-term liquidity risk issues.

How to choose the right time horizon

Take an “objectives first” approach

As referenced at the beginning of this article, it is important to identify the right time horizon in order to produce the desired forecasts. Considering what the objectives of the forecasting process are, then selecting a time horizon which produces forecasts that meet those needs, is the right approach.

The benefits of software

Using specialised cash flow forecasting software can improve the accuracy and quality, remove the administrative burden, and increase confidence in a company’s cash and liquidity forecasts. For example, with rolling 13 week flow model, the weekly forecasts produced can be analysed at the touch of a button. Quick and easy forecast vs forecast, and forecast vs actual, accuracy measurement enables biases to be identified and adjustments and corrections made as necessary.

Setting up a new process?

If you are considering setting up a new cash forecasting process, we have written a cashflow forecasting setup guide, which we welcome you to download. The guide discusses; the practicalities of designing a forecasting model, what is required in preparation for the project launch date, as well as what comes after go-live.

For a head office treasury or finance team, setting up new cash forecasting process or refreshing an existing process can bring many benefits. Being able to accurately forecast a company’s future cash position reduces risk of future liquidity issues and minimises the opportunity cost of holding uninvested cash. Also, having fast access to reliable cash flow data allows the treasury and finance team to consistently contribute to the strategic decisions being made within their organisation.

However, designing and rolling out any new reporting process in a large organisation can be challenging. Especially if adequate preparation is not done in advance. Dealing with multiple peoples in multiple places using multiple systems might seem like a daunting task, but taking a structured approach to the design and roll-out of a new process, as well as carefully managing the communication with all stakeholders, will enable a smooth roll-out and ongoing operation.

CashAnalytics has created an in-depth guide to assist people who want to set-up a cash forecasting process in their company. This guide follows a number of straightforward stages and mirrors the successful roadmap we use with our own clients. This roadmap covers five key areas:

1. Setting business objectives
2. Designing a forecasting model
3. Scoping and planning
4. Process set-up
5. Communication and roll-out

1. Setting Business Objectives

The business objectives are the reason the new cash forecasting process is being put in place. Cash forecasting supports a range of high value business activities, and the business case for putting a process in place can have a number of dimensions.

The headline activities supported by cash forecasting often include:

2. Designing a forecasting model

The design of the forecasting model itself is a critical task. At a basic level, the forecast model outlines the level of reporting detail required and the forecast time horizon.

Often the level of reporting detail in a cash forecast mirrors the level of detail in management reporting packs. This, at the very least, is a useful starting point.

It’s always a good idea to start with the simplest model first. One that provides the base level of required information. This can then be scaled to a more detailed or complex model over time.

3. Scoping and Planning

Once the business objectives have been set and the forecast model designed, the next step is to scope the project and set a plan.

This planning process won’t be much different to planning for any other project, but it remains an important consideration. A planning document should identify:

• Required timelines and other events that may impact the delivery of the project (e.g. year-end closing)
• Key stakeholders and their availability.
• Other dependent systems and data sources.
• Setting the project team and assigning responsibilities.

4. Process Set-up

The process set-up is a practical step that brings the requirements outlined in the design, scoping and planning stages to life. Whether using a manual tool such as excel or a dedicated cash flow forecasting software solution designed to automate the manual parts of the process, the three steps outlined below will need to be covered.

Step 1: Tool Configuration

Configure the chosen tool so that it mirrors the required reporting structure and maps to the correct master file data (business unit names, etc.)

Step 2: Map to Data Sources

Mapping to other data sources such as ERP systems is a key automation step than needs to be considered, but is often left until after the base reporting process is in place.

Step 3: Testing

The testing phase ensures that the implemented structures produce the required reporting output, and that the data interfaces are working correctly.

5. Communication and roll-out

Clear communication to all stakeholders will be required throughout the project. However, communication is particularly important in and around the time the process is ready to be rolled out to the wider organisation.

It is a factor that is sometimes overlooked but clear and consistent communication with stakeholders, particularly those people contributing forecast information, is key success factor in both the initial roll-out and ongoing operation of the forecasting process.

During the roll-out part of the project, training will need to be provided to everyone involved. This typically takes the form of webinars supported by training documentation. On an ongoing basis, dialogue and communication will centre on feedback, business analysis and the continuous improvement of forecast quality.

To download the full pdf of the Cashflow Forecasting Setup Guide, along with many of our other whitepapers, please follow this link to our resources section.

It is the responsibility of any business leader to focus resources on the highest value activities. Lower value activities, on the other hand, are to be automated or eliminated completely. CFOs, Finance Directors and Financial Controllers in companies of all sizes have been driving technology projects over the last decade aimed at removing administrative overheads and freeing resources to invest in these higher value activities.

The vision of most senior finance leaders is to have their teams focused on analytical tasks. Tasks that feed directly into strategic planning and decision making, as opposed to spending time on recurring, manual processes. This focus on analysing and interrogating data, rather than simply collecting and organising it, is a key differentiator between high and low performing teams. Automation plays a key role in realising this vision but the other headline consideration, that can sometime be overlooked, is deciding which tasks and jobs help a company move to this higher value focus. And, do the people moving into these new roles have the skillsets needed to fulfil them?

A common challenge

A common challenge faced by most companies is that the time freed up by the removal of slow/manual/administrative tasks, is not always allocated to the strategic/analytical ones they had planned. Instead, one set of administrative tasks is replaced with another. There are a couple of potential reasons for this; the psychology of returning to the familiar perhaps, or maybe the demands of the business mean that as soon one burden is lifted it is replaced before any repositioning can occur.

Traditional finance skill sets

The traditional skills required to be a top finance professional are well established. Gaining accounting qualifications, for example, requires a vast amount of work. It is a competitive field to get into, therefore the bar is set high. When embarking on their careers, accountants will then pick up further skills. Over time, as accounting the professional builds his or her career, developing these skills and rising in seniority, they become established, an expert at the top of their game. Now, senior in their post, they are increasingly being asked to review, remodel and analyse the data they once helped produce. Their job therefore requires skills that are separate from the ones that helped them to succeed through their careers so far.

Analytics skill sets

To excel at the new, analytical, advisory, strategic responsibilities that automation has unlocked, the CFO or Financial Controller will realise that there are new areas of skills required for their team. In our experience, those departments that truly succeed are the ones with broad analytical skill sets to supplement their traditional financial ones. It is important to note that it is a skill set that is required, rather than one, highly refined, skill.

Initially, it is the technical skills that need to be developed. Though a good professional is likely to be highly proficient in some elements of excel from extensive spreadsheet work, they will now need to develop enhanced database and data modelling skills. After this, it is the analytical skills (the core of the upskilling requirement) that need to be developed. Analytical skills involve the ability to read, interpret and understand complex data sets. A good understanding of the business then helps to turn these understandings into actionable insights. Finally, communication skills come into play. Without these skills the value of the new insights may be lost in communication.

What skills do my team need?

A range of jobs and roles exist within the data analysis sphere. In order for a CFO or Financial Controller to understand the skillsets they need on their team, it’s useful to look at the different types of data roles and what skills are needed for each role.

• Business Analyst. A business analyst focuses on turning data insights into business actions and are a valuable addition to any finance team. Business Analysts will need a solid command of database and visualisation tools as well as being good data modellers.
• Data Analyst. A data analyst is comfortable managing and querying large data sets with the goal of answering specific business questions. Data Analysts are database querying experts, SQL at a minimum, with a strong maths and stats background.
• Database Administrator. Valuable data analysis relies on a reliable source of high quality data. Database administrators ensure that all data is managed properly and is available to whomever needs it. Database Administrators have skills covering data design, data security and data recovery.

Upskilling

There are now many ways to both upskill and keep your skills sharp. Aside from traditional degree or certificate-based qualifications, offered by established universities and colleges, there are now a broad range of options to help with upskilling and keeping skills sharp. These include:

Online Courses

Numerous Massive Open Online Course (MOOC) websites have been launched in recent years that make courses offered by Universities such as Harvard and Stanford available in an online format. Some of the most popular MOOCs are Coursera and edX which offer numerous analytics courses including:

• Business Analytics – Wharton Business School
• Data Driven Decision Making – PWC
• Data Analysis Essentials for MBA Success– Imperial College London

Short Courses

Short courses, structured on or offsite, can be a great to gain a deep understanding of a new topic in a short period of time. These courses typically last no longer than a few days and can often be spread over a number of weeks. Short courses in the area include:

• Data Analysis – General Assembly (multiple locations)
• Data Analysis – BitBootCamp (New York)

Professional Qualifications

There are a number of business analysis professional qualifications offered by various bodies. While more of a commitment than an online or short course, they may suit someone interested in building a career in the area. Professional qualifications are offered by the following bodies:

• The KPI Institute
• Certified Analytics Professional Program
• International Institute of Business Analysis

Hiring considerations

For a CFO or Financial Controller seeking to increase the analytical capabilities of their team, hiring considerations may be explored alongside upskilling options for the current team. When this is the case it is important the person building out the job spec doesn’t simply dust off an old version and tack on a couple of bullet points on data modelling and analytics. Instead they should be looking at the core of what they are seeking to achieve with the new position.

After a review, it may become apparent that the best approach is to go for someone with a hybrid, analytical/accounting skill set, or it might be that the current team has enough of the accounting skills in place already to seek out a pure analytical candidate, and/or a purely technical one. As automation increases the capabilities and strategic input of the team, the business case for greater investment in the department becomes clear. Making sure that this investment, and the subsequent increase in headcount, is deployed effectively, then solidifies the departments position as a strategic business function.

Skills of the future

Beyond analytics, every department in every company in the world is looking at what skills they need to include to stay ahead of (or even perhaps keep pace with) an ever-evolving world. Because of this, the buzzwords of today shape the job specs of tomorrow. The need for a firm to keep abreast of the potential that Artificial Intelligence (AI) and Machine Learning (ML) can bring, means that every department is seeing the need to incorporate data scientists in their teams. It is no longer just the technology department that is seeing these changes, now that the potential has been seen they are being rolled out across a company. The finance and account departments are no different. They too will feel the need to be bolstered by these new skills.

The way forward

The CFO’s vision is clear. Use automation to remove low-value, manual processes and change focus to high-value, strategic, analytic tasks. However, as mentioned earlier in the article, there are traps a department can fall into once the automation is in place. The way to avoid those pitfalls, and to truly see the benefits of automation, is in the preparation. This is the upskilling groundwork done before the newly automated processes are implemented. It is only when the skills gap has been bridged that the firm can truly progress.

This article, written by Conor Deegan – Managing Director of CashAnalytics, originally appeared in the International Accounting Bulletin.

It has been over six months since President Trump signed his Tax Cuts and Jobs Act (TCJA) into law. The act reduced a range of business and personal taxes, however they most eye-catching was the reduction of the headline corporate tax rate from 35% to 21%. Before this cut, the U.S. had the highest tax rate of any OECD country. It now ranks in the lower half of the corporate tax table.

Few areas of the business world have felt the impact of these tax cuts, from a practical perspective, more than the corporate treasury departments of large multi-national companies. While much of the media focus since the cuts has been on the cash returned to investors via share buy backs and dividends, there has been huge amount of behind-the-scenes activity in addition to these headline grabbing developments. The resultant fundamental structural changes will shape corporate balance sheets and Corporate Treasury for years to come. 

What’s happened since December?

Corporate treasury and tax departments were readying themselves far in advance of the TCJA coming into law in December. This is borne out by the numbers since then, which has shown a significant uptick in certain activities:

Cash Repatriations

It is estimated that U.S. companies hold over $2 trillion offshore. The TCJA imposed a once off charge on cash repatriations, but JP Morgan estimates that $217 billion has been brought back to the U.S. in the first quarter of this year alone. The U.S. Federal reserve estimates that foreign earnings held abroad fell by an annualised $633 billion in the same period, an almost threefold increase on 2017.

Liquidating Offshore Bond Holdings

As early as February, Bank of America Merrill Lynch was reporting an increase in corporate bond spreads. They put this down to companies liquidating their offshore bond holdings in anticipation of repatriation. This has led to the bond holdings held by companies dropping significantly since December, with big players such as Apple shrinking their corporate bond portfolio for the first time in years.

Share Buy Backs & Cash Purchases

Last month, CNN reported that U.S. companies completed a record $201.3 billion of stock buybacks and cash takeovers in May. This means that repatriated cash is being returned to investors and put to work quickly by companies. Share buybacks alone hit $178 billion in the first quarter of 2018, topping the previous record set in 2007, just before the economic crash, according to the New York Times.

What to Expect in the Future

While it’s interesting to note the pick-up in certain activities since December, it’s perhaps more interesting to analyse how the TCJA will impact Corporate Treasury into the future. Below we’ve outlined some things to expect:

Less Cash

The headline impact of the TCJA from a Corporate Treasury perspective is that companies’ will now hold less cash. The TCJA reduces the need to hold foreign profits offshore, with the expectation that cash will now be put to a more productive use. Share buybacks, dividends, acquisitions, and capital expenditure will all reduce the aggregate cash balances held by companies.

Less Tax Risk

The management of tax risk is a big driver of day-to-day Corporate Treasury Activity. Treasury teams typically work very closely with their tax colleagues to map out funding routes designed to minimise tax expense. While this collaboration will continue, the penalty for getting this wrong will be lower due to the greater alignment between European and U.S. tax rates.

More fluid capital flows

Bringing cash into the U.S. from certain foreign locations is now less expensive and therefore the flow of cash between foreign entities within the same business will become more fluid. The lower risk and administrative overhead is expected to grease the wheels of cross border capital flows.

Lower Debt Levels

Most corporate debt is rolled over on maturity by issuing a new debt instrument or raising bank funding. Now U.S. companies, flush with cash, plan to repay debt fully, either before it matures or on maturation. A survey in 2017 by Bank of America Merrill Lynch showed that paying down debt was expected to be the number one use of repatriated cash, ahead of share repurchase and capital expenditure.

Planning for the Future

All of the above is good news for Corporate Treasury. The imbalances created by disparate tax rates in Western economies will be eroded as balance sheets adjust to the new environment. Corporate Treasury is now in a position to drive significant investment into their operations, safeguarding its role as a strategic partner. To do so, it must reinvigorate its way of operating, and question what’s been taken for granted in the past. Businesses, especially those in the U.S., are now more dependent on Corporate Treasury than ever before. This provides a massive opportunity that must not be missed.

Working with treasury and finance teams across the globe, we see a large number of cash forecasting processes with varying degrees of automation. Some are fully automated, “no touch” processes, some deploy automation at key steps in the process, while others are fully manual, labour intensive processes. In this post we look at what forecasting automation is, what the benefits of automation are, which components of the process can be automated, and how cash forecasting automation can be achieved.

What is cash forecasting automation?

There are many workflows, data inputs, and communications and reporting exercises that make up a cash forecasting process. Cash forecasting automation may refer to automating the process in its entirety or may refer to the automation of the constituent parts of this process.

As mentioned above, the extent to which the process is automated, and indeed how the process is automated, fall on a spectrum. Some parts of the cash forecasting process may be automated with Machine Learning (ML) or Artificial Intelligence (AI) technologies, or those technologies may be used at the end of the process and deployed more on the output. This post focuses on how cash forecasting processes can be automated without ML/AI. For further reading on how ML/AI can be used in cash forecasting, we have written an article discussing how ML/AI methods of forecasting compare with traditional statistical ones, which explores the topic in further detail.

How can automation benefit treasury and finance teams?

Automating the cash flow forecasting process brings many benefits, namely:

• Risk reduction. Automating part or all of the process reduces the risk of human error, thereby improving confidence in the forecast.
• Increased efficiency. Treasury teams, even those in the largest organisations, are often small. Automation can therefore increase efficiency and alleviate an overburdened workload. In turn, this changes the focus of activities from administration to analytics.
• Improved quality. When the process is carefully designed and mapped from the outset, automation can leverage data already in the corporate technology infrastructure (TMS systems, ERP systems, bank systems, etc.). This, when combined with the factors listed above, means that automation can substantially improve the quality of the forecasts produced.

The result of these benefits is that automation doesn’t just mean fewer mistakes, when applied well, it leads to a roundly improved, best practice forecasting process.

Input data automation

Typically, there are two sets of data collected in a cash forecasting process, the forecast data and the actual data. Automating the input of this data to the process encompasses both the collection and classification of this data. This be achieved by either algorithmic or rules-based classification.

Forecast cash flow data

• Accounts payable/accounts receivable. Forecasting AP and AR is an integral part of the cash forecasting process. Quite often, short-term payable and receivables are already recorded in ERP/accounts systems. If this data is available, it is therefore beneficial to include it in the forecast process. For more information, read our post on increasing accounts receivable forecasting accuracy.
• Budgeting/planning systems. Longer-term forecasted cashflows may be contained in budgeting/planning systems.
• Treasury Management Systems (TMS). Depending on the system, and how it is being used, the TMS can also hold some of the required forecast cashflow (such as financing or intercompany cashflows).

Actual cash flow data

• Bank account data. Most commonly stored in MT940 or BAI2 files, automating bank account inputs means identifying and extracting the relevant information automatically.
• ERP/TMS systems. In a similar way, actual cash flow data can be pulled automatically from these systems and fed directly into the cash forecasting process.

Workflow automation

Without automation a cashflow forecasting process for head office teams can involve significant manual work, therefore automating key workflows can alleviate much of this administrative burden.

Input workflows

• Automated submission management. When a new submission cycle is due, an automated process; sets up the new version, triggers any required actions (such as reminder emails), and catalogues the version accordingly. This automatic versioning enables an easier forecast vs forecast, and forecast vs actual analysis, once the version is complete.
• Automated workflow triggers. For example, one of the key workflows at the beginning of the process is to send reminder emails to all contributors, informing them that a new submission is due, prompting them to input any and all required data. With automated workflow triggers, these emails can be generated and sent within the system automatically. In addition, approaching a deadline date, users can be prompted by further automated reminders.
• Variance justification. Where users have submitted data that exceeds a predetermined threshold, an automated system can detect the variance and prohibit it from being submitted without a comment to explain the variance. In this instance, a user would be required to provide feedback on why the threshold had been exceeded before the submission could be made.
• Intercompany reconciliation. Intercompany reconciliation can be a very time consuming and laborious task for a company’s head office finance team. To automate this element of the process, the full process must be designed in a way that considers the automation of intercompany reconciliation up front. For example, the system could be built to include a full counterparty driven process or process where the reconciliation and variance reporting is systemised.

Output workflows

• Real time feedback. When actual cash flows are updated (whether manually or collected automatically) a feedback notification can be issued automatically informing the user of any variation to the forecast. This enables quick and easy amendments to forecast figures, thereby improving accuracy.
• Reporting and analytics automation. Where the process is automated, scheduled reporting, can be automatically generated from the system and circulated to key stakeholders as required. For example this might consist of a weekly or daily cashflow report, bank account reports, or reports on funding requirements.

Using specialist software

As discussed above, a cash forecasting process can be automated in its entirety, or it can be separated into its constituent parts, which can each be automated in isolation. In either case, automation is difficult if not impossible to achieve without the use of specialist cash flow forecasting software.

If you are setting up a new cash flow forecasting process, please read our Cashflow Forecasting Setup Guide.

If you have any questions, or would like any advice on how to automate any or all of the elements of your cash forecasting process, please do not hesitate to contact us.