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September 29, 2017

Sources of Cash Forecasting Data

When considering sources of data for a cash forecasting process we need to have clarity regarding what are the key inputs, and what purpose they serve. Obviously we need forecast information, but to get maximum value from the process, we need to measure our performance, and we do this by recording the actual cash flows (actuals).

So the question becomes two-fold; where do we get our actual data and where do we get the forecast data?

Actual Cash Flows

The goal with actual cash flows is to minimise human touch as typically this information already exists in bank files, financial systems and Enterprise Resource Planning (ERP) software. Looking a little further into each:

ERP / Accounts Systems

Most large organisations run on an ERP system and are often using one of either SAP or Oracle, but there are many others. These systems have built in data inputting/outputting capabilities as standard.

If, for example, your AP and AR information is contributing to your cash flow forecast, it makes sense to have these cash flows mapped to your cash forecasting software. This is normally done via an Application Programming Interface (API) or a file load, depending on your cash forecasting software provider.

There will often be a mapping exercise to pre categorise and group the data from the source system into the appropriate grouping for your forecasting system. For example you may be forecasting in weeks but your ERP records transactions at a daily level. That is just a case of grouping the days into weeks before loading the information into your forecast.

Bank File Downloads

Most banks can provide bank statements in electronic formats. The two main formats are BAI2 and MT940s. In general, but not exclusively, BAI2 tends to be favoured in the U.S. and MT940s in Europe. Each of these standards have their differences. In the case of MT940 there are structured and unstructured formats, relating to how the data is organised in the files.

Unfortunately some banks have slight differences in their implementations, particularly in the case of MT940 structured files.This can be an inconvenience if you bank with multiple different banks, but again that is an issue of implementation rather than a treasury problem.

Forecast Cash Flows

There are fewer data sources providing forward looking or future information. The knowledge of future trading exists mainly in planning departments. There are still some systems which can provide information however.

Treasury Management Systems (TMS)

Your TMS system will have treasury and financing related cash flows such as interest and capital payments on loans or FX cash flows for example. These cash flows can be integrated into your forecast data via an API.

Data Modelling Software

There are some modelling applications which allow you to extrapolate from previous information to produce a forecast. Whether this will be accurate enough to provide any meaningful data will depend on many factors including; regularity of business, forecast duration, quality of models, quality of input etc. In many cases models will only offer a reasonable forecasts for a short period.


When it comes to forecasting the main source of information will be the people in the various business units/subsidiaries/projects (depending on the organisation). It is critical that head office gets buy-in from all people involved and explains to them the value and importance of the forecasting process. Then it is up to the various controllers or people responsible to produce their forecasts and this information then needs to be collated by your forecasting software.

People bring the thinking power to the process, for example an ERP system might provide 10-15 days forward looking AP/AR information but it is the insight and experience of the collections team who are best placed to make a judgement call on any cash flows that go beyond that period.


The treasury team need to review existing systems to see what information they already have access to and what can be used in the forecasting process. The value of connecting these systems really needs to looked at on a cost benefit basis. Any connection of systems will involve an overhead. It will come down to ease of integration versus the amount of usable data retrieved.

Once all automated data feeds are connected it is then down to people. The final piece of the puzzle is getting the right people involved in the process to maximise the use of your organisation’s knowledge of future trading.

August 27, 2017

Cashflow Forecasting Best Practice

Cash forecasting is often described as an arduous task. However, it is a critical process that shows how much cash a business will generate and what cash will be needed to fund future working capital and expansion. In most organisations cash forecasting has a bad name due to the amount of time it takes to do it properly and the poor results it often produces. As with forecasting of any type the results calculated will never be 100% accurate and, in a world where absolute precision is demanded at all times, this can be disheartening.

The flip side of lack of confidence is over confidence. Forecasting with 99% accuracy the day before an event isn’t very impressive and ultimately provides little decision making value. Somewhere in between this false confidence and the valley of despair lies the point of most value for your company.

In this post we look at three key elements to cashflow forecasting best practice. A process that combines direct human input with cash flow information stored in systems and the projections generated by forecasting models will produce the most accurate and reliable results. The mistake most companies make is to focus too intently on one element, ignoring the others, in the hope that it will produce a respectable forecast. In many cases it will but it won’t produce something that you can use for decision making or strategic planning on a daily basis.

Forecasting user input

It could be argued that humans sit behind each of the three elements we discuss, which they do, but for this discussion we will treat them as the source of information that doesn’t sit in a system or can’t be modelled. Generally this information relates to special projects, acquisitions or seasonal events.

In many cases domain or situational knowledge, such as knowing a specific customer’s payment patterns, allows adjustments to be made to a forecast that will dramatically improve its accuracy. This critical thinking is the essential ingredient in any planning based discipline.

Cash forecasting systems

Many companies fall into the ‘over-automation’ trap when designing a forecasting process by assuming that they can fully automate their way to an accurate forecast. This often leads to huge amount of time and money being spent on projects that will only be judged successful if 100% automation is achieved.

Systems don’t provide a silver bullet solution but are important for two reasons. Firstly they contain information necessary to complete the forecast itself and secondly they help with the automation of manual processes and analysis of data. As such they play a very important role but only as part of an overall solution.

Cash forecast modelling

Modelling your way to an accurate cash forecast is almost as difficult as full scale automation. It’s convenient to think that a sophisticated spreadsheet model will provide the right answer as this would save a lot of time and effort. Modelling can produce a believable projection but it is unreliable for short and medium term forecasting where a greater level of timing precision is required.

Modelling is necessary however for certain components of a cash flow. Revenue and input prices are typically dependent on external factors such as customer demand, raw material costs and FX movements which can be modelled and then tweaked using the latest available information.

Understand what’s needed in a cash forecasting process

A cash forecasting process that captures information from humans, systems and models will produce the most accurate projections of future cash flow. No two companies will have the same cash forecasting requirements but an understanding of what each element can provide as well as its limitations will allow you design a process that provides maximum value to your organisation.

June 30, 2017

Working Capital Metrics

Head office treasury and finance teams often find themselves in a frustrating position when it comes to managing working capital across their organisation. While they play a critical role in the provision of liquidity, they sometimes have limited ability to influence the efficiency of the working capital process they fund. Ultimately the cost of a poorly managed working capital cycle will have a constant drag on earnings and if treasury is required to fund shortfalls, external interest costs will increase.

The terms cash management and working capital management are often used interchangeably in a corporate environment. This can be slightly misleading as while they are closely related disciplines, cash is simply one aspect of working capital management. Therefore head office controllers and treasurers seeking to initiate working capital improvements will firstly need to understand the behavior of the short term assets and liabilities that drive the process – notably accounts payable, accounts receivable and inventory.

Who’s involved in the Process?

In large companies, many people will play a role in the working capital cycle. The exact makeup of stakeholders will vary depending on the company and industry but typically people in the following departments will have the largest influence:

Sales – Sales teams agree payment terms to new and existing customers. The payment terms offered by sales teams form a key part of commercial negotiations, particularly in low margin industries, and will influence future working capital.

Credit and Collections – Credit teams play a dual role in managing working capital. Firstly, they should be involved in setting acceptable credit limits and terms that can be offered by their sales teams to customers. Secondly, credit and collection teams monitor customer invoices versus credit terms and chase up overdue payments when required.

Procurement – Procurement teams have huge influence over working capital as they, for the most part, control the stock levels maintained by companies. For a manufacturing based business, with large raw material requirements, procurement will typically be the biggest spenders and control the largest budgets.

What metrics should I be monitoring?

Any improvement proposal or strategy must be backed up by facts. By gaining an understanding of the metrics that influence working capital within your organisation, you will be in a better position to positively influence the overall process.  Start with the simplest metrics first and focus on the largest sections of your business or the areas that experience the most volatility.

Gaining visibility over the following metrics and understanding their variability will provide the basis for any improvement efforts:

Days Sales Outstanding (DSO) – DSO shows how long it takes to collect cash from customers. Faster sales collections have a positive working capital impact.

Days Sales Outstanding - Working Capital Metrics

Days Payables Outstanding (DPO) – DPO shows how long it takes to pay customers. Longer payment durations have a positive impact on working capital.

Days Payables Outstanding - Working Capital Metrics

Days of Inventory Outstanding (DIO) – DIO shows how quickly inventory is sold. Selling stock faster has a positive impact on working capital as it means that cash is not tied up in unsold goods.

Days of Inventory Outstanding - Working Capital Metrics

Cash Conversion Cycle (CCC) – The CCC uses DSO, DPO and DIO to demonstrate how effective a company is at managing its short term assets and liabilities. This is a key indicator of management efficiency.

Cash Conversion Cycle - Working Capital Metrics

A short cash conversion cycle indicates that a company is managing their working capital cycle in an efficient manner and cash is being converted quickly from raw materials to cash sales receipts.

To make working capital improvements, finance and treasury teams must be firmly aligned with the people managing the various components of the cycle while also having a firm grasp of the performance metrics and KPI’s. Without access to, and an understanding of, the metrics that govern your working capital cycle it will be impossible to initiate positive changes.

April 10, 2017

Differences between Direct and Indirect Cash Forecasting

When setting up a forecasting process, there are two main forecasting methods to be considered – direct and indirect. In this blog post we look the attributes of each method including; when they should be used, how they differ, and the pros and cons of each.

Direct Cash Forecasting

Direct cash forecasting is a method of forecasting cash flows and balances used for short term liquidity management purposes. Direct cash forecasting, sometimes called the receipts and disbursements method of forecasting, aims to show cash movements and positions at specific future points in time.

The inputs into a direct cash forecasting process are typically upcoming payments and receipts organised into units of time such as a day, week or month. These units of time are then aggregated to the length of time that the forecast is set to cover. The time frame for when a direct method of cash forecasting is useful is generally less than 90 days, however it may stretch to one year.

Indirect Cash Forecasting

An indirect cash forecast is one that is derived from a various projected income statements and balance sheets, generally done as part of the planning and budgeting processes. There are three methods of deriving an indirect cash forecast:

Adjusted Net Income (ANI): This is in effect a projected cash flow statement, it is derived from operating income, either EBIT or EBITA, changes on the balance sheet are then applied, such as Accounts Payable (AP), Accounts Receivable (AR) and inventories to forecast cash flow.

Proforma Balance Sheet (PBS): The PBS method looks at the projected balance sheet cash account at a future point in time. If all other balance sheet accounts have been projected correctly, cash will be too.

Accrual Reversal Method (ARM): The ARM is hybrid of the ANI and direct methods and uses statistical analysis to reverse large accruals and calculate the cash movements for individual periods.

What type of Forecasting Method to use?

In the very short term the direct method is a useful tool for treasury and cash managers to manage the day to day cash and funding requirements of a business and also assist with borrowing and investment decisions. Often actual cashflows are captured as part of the process and through variance analysis used to determine how accurate the forecasts are.

Medium term forecasts, either weekly or monthly are used for the purposes of liquidity management and assisting with investment decisions for companies with surplus cash. Medium term forecasts are also useful as an early warning signal for the purposes of covenant and net debt reporting.

Longer term indirect forecasts, greater than one year, are carried out on an accountancy basis. They are often linked to the strategic goals of the business, such as the capital expenditure that is accounted for over a number of years. The major downside of longer term forecasts is a drop off in accuracy.

Summary of Direct and Indirect Cash Forecasting

The key attributes of direct and indirect forecasts are summarised in the table below:

 Direct ForecastingIndirect Forecasting
Time HorizonShort to medium term, generally less than 1 yearLonger term generally more than 1 year in the future
What Should it ShowOperational cash requirements and cash required to fund working capitalCash required to fund longer term growth strategies and capital projects
How is it ConstructedAnalysis of upcoming receipts/ debtors and payments/ creditorsVarious income statement/ balance derivations (adjusted net income, pro-forma balance sheet etc.)
ProsEasily understood High accuracy can be achieved over short term periods Can be very detailed and only focused on cash Gives a forecast of cash balances at various points in the future.Aligned to financial plans Suitable for longer term planning
ConsCan be difficult to reconcile with financial plans Not an appropriate tool for longer term planning.Accuracy not as high as direct forecasts Difficult to perform variance analysis Limited us in assisting with operational day to day cash management. Limited to the intervals of the financial plan


February 11, 2017

Liquidity Management Planning Key Considerations

In today’s economic environment no one needs to be reminded of the importance of cash and efficient liquidity management planning. Corporate culture now focuses more intently on cash than ever before. Open the annual report of any large public organisation and cash related KPI’s are sure to be front and centre of business performance summaries. Large private companies are more likely to benchmark against cash flow targets as they aren’t constrained by market reporting requirements, which are typically accounting based. Private Equity, as another example, cares only about cash.

Central to efficient liquidity management is cash flow forecasting. A cash forecast is a tool used by finance and treasury professionals to get a view of upcoming cash requirements across their company. In this post we look at the key internal considerations when setting up a cash flow forecast. Broadly speaking they are influenced by three main drivers:

• Business liquidity needs;
• Sources of cash flow data; and
• Capabilities of current IT systems.

Business Liquidity Needs

In starting any process or implementing change, it is always advisable to start with the end in mind. For a cash forecasting process that means taking the time to analyse and understand the high level business objectives and consider how detailed the process needs to be. The bullet points below outline items to consider:

• Is the goal of forecasting to assist with short term, medium or long term planning?
• What reporting output do the CFO and CEO require? How frequently do they need a forecast position? Are any external stakeholders such as banks involved, what are their requirements?
• What level of FX breakdown and analysis is required? If the goal of the process is to assist with a hedging program it is critical that cash flows in entity operating currencies are captured.
• How many legal entities or subsidiaries should be involved in the process to gain the required level of visibility? Should the goal be to focus on the large entities that encompass 90% of the main cash flows or does the process need to capture all cash flows?
• What level of detail is required in the cash forecast, i.e. are only high level AP and AR classifications required?
• How regularly should the forecast be refreshed? How often does the executive team require an updated view of the cash position?
• Is working capital analysis important to the reporting process? If so, what additional non cash flow items need to feed into the process?

Data Sources

Following the identification of business needs, the next step is to figure out where the necessary data will be sourced. It may sound obvious but it is a crucial step on the way to designing an effective cash forecasting process. For example, if a business needs short term cash over, say, the next 10 business days, the majority of this information will be sourced from an ERP system or another platform that would manage AP and AR. Typically, ERP systems will contain 10 -15 days of reliable payment forecast data and provide some indication of expected receipts. Moving out the curve to a mid to long term forecast, it’s highly unlikely there will be reliable data in any system and it will therefore be necessary to interface directly with entity controllers.

Although the two examples above are the two extremes of the planning cycle, the key point is that the data required for a forecasting process can reside in many different locations. In terms of data sources, additional items to consider include:

• For each cash flow type (AP, AR, Tax etc.), where does the most up to date information reside? A good way to do this is to list each cash flow by type (forecast or actual) and map it to a data source, either a system or a department.
• If the data resides in an ERP system can this be extracted easily to contribute to the forecasting process? Does it make more sense to access the data from a Data Warehouse?
• For data residing in systems who is the key internal resource that will assist with each system?
• What do entity controllers use to manage their own forecast? Can this be easily integrated with a central model?

We have written more about this here.

Capabilities of Current Systems

When analysing where data is sourced, this invariably involves reviewing the current finance systems already in place. Therefore it is a natural follow on to consider the functionality of these systems. In terms of assessing the current systems in place, it is prudent to assess if they are “fit for purpose”. Important factors to consider are:

• Does any in-house technology address the requirements outlined above?
• If so what would be the cost and timeframe of adapting/modifying existing systems to manage the process
• How old is the current technology and is it up to current security standards?
• If the current system is a back office finance system does this provide adequate ease of use for entity controllers?
• If we build or “bolt-on” to an existing system how will this affect the upgrade path of the existing software?
• Would the proposed solution deliver the flexibility to meet the challenges that occur with changing business requirements and external conditions?
• How do existing software packages stack up in comparison to best in class forecasting systems?

Understanding the business drivers when initiating a cash forecasting project is critical to ensuring not just a successful implementation but also building a sustainable process. Internal considerations are the place to start, from the needs analysis, to where the information resides, through to tools that can be used to help manage the process.

October 18, 2016

What is Cash Flow Forecasting?

Cash Flow Forecasting is the process of obtaining an estimate or forecast of a companys future financial position and is a core planning component of financial management within a company. It might sound obvious but the main output or deliverable of a cash flow forecasting process is a cash flow forecast. A cash flow forecast is a projection of an organisations future financial position based on anticipated payments and receivables. The process of deriving a cash flow forecast is called cash flow forecasting.

Goals of Cash Flow Forecasting

The main goal of a cash flow forecasting is to assist with managing liquidity within an organisation and ensuring that the business has the necessary cash to meet its obligations and avoid funding issues, essentially better management of working capital. Underneath the high level goal of liquidity management, there are often a number of reasons why companies set up a cash flow forecasting process, these include:

• Covenant forecasting and half/ full year reporting visibility.
• Interest and debt reduction.
• Short term liquidity planning.
• Long Term Planning/ Budgeting Purposes (e.g. 3 year plan)


Methods of Cash Flow Forecasting

There are essentially two main types of cash forecasting methods – direct or indirect. Direct cash forecasting is a method of forecasting cash flows and balances for short term liquidity management purposes, typically less than 90 days in duration. Direct cash forecasts often but not always include system based cash flows so as to make the cash forecast as close to real time as possible.

Indirect cash forecasting is often longer term in nature and it relies on various indirect methods of building up a cash forecast such as using projected balance sheets and income statements.

The table below outlines the main differences between direct and indirect cash flow forecasting:

What is Cash Flow Forecasting?


Management of a Cash Flow Forecasting Process

In larger companies, the management of a cash forecasting process is controlled by the head office treasury or finance team. The work to be done in terms of assembling a forecast position generally involves sourcing data from both systems and people. The more complex an organisation, the more systems will contribute to the process, therefore it is critical to have the sources of cashflow data mapped and clearly defined.

Although systems are important, it will be the buy-in and engagement of people that will determine how successful a cash forecasting process will be. Involving the people who will be accountable and ensuring their buy-in is a key factor for success particularly for direct cash flow forecasting.

July 20, 2016

Section 385 – Documentation Requirements

On 4 April, 2016 the U.S. Treasury and IRS announced proposed new regulations under Code Section 385 aimed at curbing earnings stripping by multinational organisations through the use of intercompany debt. 

A central part of these proposed regulations are new Documentation Requirements which if implemented as proposed will impact the way companies administer their intercompany debt arrangements. When the proposed Section 385 regulations were announced the Treasury outlined the rationale behind the Documentation Requirements.

“Under current law, it can be difficult for the IRS to obtain information to conduct a debt-equity analysis of related-party instruments, especially information that demonstrates the intent to create a genuine debtor-creditor relationship.  This lack of detail in a taxpayer’s documentation can make IRS enforcement difficult.”

In an effort to allow the IRS to more easily carry out this debt-equity analysis the regulations will require companies to maintain four different types of documentation:

1. A Binding Obligation to Pay Principal and Interest

This requirement ensures that, within 30 days of the start of the loan, a legitimate legal contract is in place between the intercompany borrower and lender.  

While exact guidance on what should be included in this binding obligation has not yet been outlined, a commercial loan agreement would typically include details about:

  • Capital and lending limits
  • Interest rates and
  • Payment timelines

2. Creditors Rights

Creditors rights are designed to protect the Creditor (lender) in the event that the Debtor (borrower) cannot meet its payment and repayment obligations as outlined in the previous section. These rights outline how the Creditor can recover the capital owed to it by the Debtor.

This is perhaps the area that will require the most legal due diligence. A borrower offering creditors rights to a lender under one loan agreement will impact the borrower’s ability to offer rights to other lenders in other loan agreements.

3. Proof of Reasonable Expectation of Repayment

This requires the maintenance of documentary evidence that the debtor will, within reason, be able to repay the debt and associated interest in line with the terms of the loan agreement. This will force companies to carry out due diligence on intercompany borrowing counterparties to prove repayment capacity.

This is one of the areas of the new proposed regulations that will require the most clarification by authorities ahead of implementation. Likely documentation requirements include:

  • Cash flow projections
  • Financial ratios
  • Detailed financial statements (p&l, balance sheet etc.)
  • Scenario analysis

4. Evidence of an ongoing Debtor Creditor Relationship

The final documentation requirement which focuses on providing evidence of an ongoing debtor-creditor relationship could potentially have the biggest ongoing impact on tax and finance departments charged with responsibility for compliance with the new regulations.

Again, the authorities will need to clarify exactly what will be needed to “prove” an ongoing debtor creditor relationship exists. Likely requirements include:

  • Proof of interest and principal payments
  • Ongoing provision/ update of financial projections, ratios and statements
  • Missed payment remediation and/ or default procedure

What’s Next

The speed at which the authorities indicated they would implement these new regulations was one of the areas of most concern for those who expect to be impacted.

While the Treasury or IRS have not provided exact guidance on when the Section 385 regulations will be finalised it has been indicated that they will come into effect around Labor Day in early September.

June 06, 2016

Section 385 – What the Experts are Saying

It’s been two months since the U.S. Treasury and IRS surprised the market by announcing proposed regulations designed to curb earnings stripping by U.S. based multinationals through the use of related party debt. These proposed regulations, issued under section 385, are anticipated to have wide ranging effects on how companies manage intercompany debt and how the IRS treats such arrangements for tax calculation purposes.

In summary, the proposed regulations will:

1. Impose documentation and reporting requirements on companies that have intercompany debt which if not complied with will result in the debt being treated as equity for tax purposes.

2. Allow the IRS to “bifurcate” a debt instrument by treating it partially as equity. At present, funding instruments are treated as either debt or equity, but not both.

3. Treat intercompany debt wholly as equity if certain rules aren’t adhered to such as the “General Rule” and the “Funding Rule”.

Market experts such as the large accounting and law firms have been poring over the proposed regulations since their release resulting in a steady stream of Briefing Notes and Client Alerts.

Outlined below is a summary of what some of these firms are saying along with advice for companies who expect to be impacted by the regulations, with a focus on operational considerations and documentation requirements. 

Baker McKenzie

Client Alert (19 April, 2016)

This Client Alert is an extensive overview from Baker McKenzie, detailing and providing commentary on all aspects of the proposed new section 385 regulations. Key points raised include:

• The new regulations will apply equally to non-inverted foreign based multinationals and US multinationals.
• The Treasury “intends to move swiftly” to finalize the regulations.
• The Treasury and IRS now expect companies to treat intercompany loans with the same “discipline” as external loans. “The days of flexible intercompany lending are nearing their end”.
• Impacted Groups will need to implement new processes to prepare the necessary loan documents which, in turn, will need to be diligently monitored over the lifetime of the loan.
• More relaxed standards may be imposed for managing cash pools and other operational cash management structures.
• There is currently no relief proposed for non-compliance with the Documentation Requirements. Non-compliant intercompany debt will be treated as equity.

Download the full alert here.


How the Proposed Section 385 Regulations Could Impact Corporate Treasury

This publication from PwC outlines at a high level the potential impact of the proposed section 385 on corporate treasury activity. Key considerations include:

• Internal financing structures such as cash pooling may need to change if they are structured as intercompany loans.
• Unwinding of such internal structures may limit cash flow visibility and central control of cash.
• Third party financing of legal entities may be required if internal structures are no longer cost/ capital effective or tax compliant.
• Other centrally managed services such as FX risk management may be altered by changes in group structures.
• A review of current processes and technology will be required to understand what burden the “cumulative impact” of the proposed regulations will have on day-to-day operations.

Download the full publication here.

Duff and Phelps

Webcast; Demonstrating Debt is Debt: Implications of Proposed 385 Regulations (May 18, 2016)

In this webcast Michelle Johnson and David Turf, both Managing Directors with Duff and Phelps in Chicago, detail how companies can justify their intercompany debt arrangements through actions taken at the inception and throughout the life of a loan. Key points include:

• Clearer guidance on documentation requirements is needed in order to avoid both the inadvertent omission of necessary documents and the provision of unnecessary documents.
• The presence of documentation proving a “reasonable expectation of repayment” is expected to be important and difficult.
• While there are laws governing intercompay debt many transactions remain undocumented. Even where documentation exists, it may be insufficient to satisfy the other components of the proposed regulations.
• The webcast runs through a range of financial statements and ratios that will need to be analysed and documented when determining the creditworthiness of a borrower.

Proposed actions to take now include:

• Review existing documentation.
• Open up the conversation to all stakeholders (tax, treasury, legal etc.).
• Create an inventory of loans with all key details.
• Consider making anonymous comments through an industry group.

Watch the webcast here.

Morrison Foerster

Client Alert (April 12, 2016)

This alert was released by the Morrison Foerster Tax department shortly after the proposed regulations were announced. Key takeaways include:

• The various documentation requirements are a “threshold requirement” of the new regulations. Meeting these requirements, however, does not establish the instrument as related party debt.
• Documentation must include evidence of ongoing capital and interest payments in line with the initial agreement.
• Documentation must be maintained for all taxable years that the related party debt instrument is outstanding and until the “period of limitations expire.”
• The proposals do not include guidance on where and in what manner the documentation must be kept.

The full alert can be accessed here.

April 12, 2016

Section 385 – Proposed new anti-inversion and earnings stripping regulations

On 4 April 2016, the U.S. Treasury and Inland Revenue Service (IRS) issued temporary and proposed regulations aimed at curbing corporate inversions and earnings stripping. The proposed regulations will have a far wider reach than just corporate inversions and, if implemented as proposed, are expected to dramatically impact the management of intercompany debt.

Background to Corporate Inversions

The U.S. Treasury released a fact sheet alongside the announcement which provides a succinct description of a Corporate Inversion and why they are undertaken.

“A corporate inversion is a transaction in which a U.S.-parented multinational group changes its tax residence to reduce or avoid paying U.S. taxes. More specifically, a U.S.-parented group engages in an inversion when it acquires a smaller foreign company and then locates the tax residence of the merged group outside the United States, typically in a low-tax country. Typically, the primary purpose of an inversion is not to grow the underlying business, maximize synergies, or pursue other commercial benefits. Rather, the primary purpose of the transaction is to reduce taxes, often substantially”.

There have been a number of high profile corporate inversions in recent years which have been criticised heavily on both sides of the political divide. Pfizer’s proposed acquisition of Allergan has been the first high profile victim of these regulations when it was called off on the day of the announcement. The proposals made by the Treasury and IRS involve two actions; temporary regulations designed specifically to Corporate Inversions and a proposed regulation to address earnings stripping.

Action 1: Temporary Action to Limit Inversions

This action was taken under section 7874 and follows efforts made by the Treasury in September and November 2015 to limit inversions.

This latest release acknowledges that the existing laws designed to control inversions can be circumvented by a foreign company growing rapidly through acquisitions to a scale that allows them to avoid the current 7874 rules when acquiring American companies. When deciding if a foreign company’s purchase of an American company should be subject to inversion laws, the new temporary regulation changes the calculation of “ownership percentage” which will now exclude “the stock of the foreign company attributable to assets acquired from an American company within three years prior to the signing date of the latest acquisition”. In summary, the value attributed to acquisitions in the last three years won’t be taken account of when determining the value of an acquirer relative to their target.

Action 2: Proposed Action to Limit Earnings Stripping

Alongside the temporary regulations outlined above, the U.S. government is proposing actions under section 385 that will target earnings stripping in multi-national companies. These proposed regulations focus primarily on three areas:

1. Targeting loan transactions that does not finance new U.S. investment

This new proposed regulation under section 385 of the code, in the Treasury’s own words, targets “transactions that increase related party debt that does not finance new investment in the United States.” The actions specifically make it difficult for foreign owned entities to “load up” their U.S. subsidiaries with related party debt following an inversion by treating as stock the instruments used in such a transaction. The proposed regulations “treat as stock an instrument that might otherwise be considered debt if it is issued by a subsidiary to its foreign parent in a shareholder dividend distribution.” The Treasury states that the regulations will apply to transactions issued on or after April 4. Tellingly, they commit to moving “swiftly” to finalize them.

2. Part debt, part stock treatment of related party debt

This element of the regulation proposes the implementation of a statutory authority that would permit the IRS, on audit, to treat a related party debt transaction as part debt and part equity. This is a departure from current rules which take an all-or-nothing approach to the treatment of related party debt. The current approach is deemed to “create distortions when the facts support treating debt as part debt and part stock.”

3. Documentation Requirements

This requirement will compel companies to maintain documentation that demonstrates a commercial debtor-creditor relationship between internal lenders and borrowers, similar to those maintained with external lending counterparties. This documentation will include:

– A binding obligation for the issuer to repay the principal;
– Creditors rights;
– Proof of a reasonable expectation of payment; and
– Evidence of ongoing debtor-creditor relationship.

If these requirements are not met, related party debt will be classified as stock for tax calculation purposes. The regulations as currently proposed provide no relief for non-compliance with these documentation requirements.

Related Reading

There has already been widespread comment from accounting and law firms and other interested parties since the release of these regulations last week. The market is still digesting the true short and long term impact of these proposals and most commentary to date is focused on breaking down the details of the regulations. One thing is for sure, if passed as proposed, these regulations will have a profound impact on the way companies manage intercompany debt from both an administration and planning perspective.

The Treasury press release is available here.

The Treasury Fact Sheet is available here.

The President’s Review of US Business Tax reform is available here.

January 29, 2016

Measuring Forecast Accuracy – An Introduction to Performance Analysis

Conversations about forecasting accuracy happen at a number of different levels within finance teams. They can be between treasury and the CFO or treasury and entity controllers. Although the conversations can vary in nature, the issue discussed is often similar, how accurate are our cash forecasts and how do we improve it in order to make better working capital and funding decisions?

The first step in improving accuracy is measuring accuracy. In this article we discuss an accuracy measurement methodology called ‘Performance Analysis’. This methodology provides a consistent and easy to explain basis for both measuring and improving forecasting accuracy.

Start with Actual vs Forecast Analysis

Performance Analysis sounds complicated but, don’t be put off straight away, it’s simply a continuation of analysis you probably already carry out. Most people will be familiar with actual versus forecast analysis. This type of analysis measures the accuracy of a forecast by comparing it to the actual cash flow movement or balance at a point in time.

The actual versus forecast accuracy calculation is pretty straight forward – in the example below we used forecasted receivables to demonstrate the calculation.

Forecasting Accuracy

On its own this simple actual versus forecast comparison is interesting but it tells the Treasurer or CFO very little about how accurate the forecast has been leading up this point or, in other words, how the accuracy of the forecast has “performed” historically. Without understanding historical accuracy how can we rely on our forecast? Is the fact that the forecasts are very accurate or inaccurate just a once off?

Being able to understand trends in accuracy will allow you to build confidence in the information you use for decision making purpose.

In Practice

Say, for example, you operate a six week forecast that rolls over every week and we are at the end of the sixth week of the year (i.e. we’ve collected six forecasts to date). As part of the process actual cash flow data is also captured that allows you to measure the accuracy of previous forecasts. This means every week, using this week’s actual data, you can analyse previous forecasts to understand how accurate they were. The table below shows the accuracy, for each weekly period, of the very first forecast of this year ‘Forecast 1’. We had been able to measure the accuracy of the first five weekly periods using actual figures from previous weeks. The accuracy highlighted in red was calculated using this week’s actual data.

Per Period Analysis
 1 Week2 Week3 Week4 Week5 Week6 Week
Forecast 192%90%77%61%57%51%

In this example we can see in Forecast 1 our one week forecast accuracy was 92% but our four week accuracy fell to 61%. Therefore in the short term our forecasts were very accurate but in the medium term accuracy decreases significantly. While it is useful to know this, it doesn’t provide a huge amount of value as we don’t know if these accuracies are a once off or consistent with historic trends.

This is where Performance Analysis comes in – if this type of actual versus forecast analysis is carried out every week the results can very quickly provide a telling insight into the true accuracy of your forecast.

Performance Analysis

We’ve expanded this example to include analysis carried out in the weeks following Forecast 1. By combining this analysis with analysis carries out in subsequent weeks you start to build a far richer view of forecasting accuracy – a view that shows historic accuracy trends across all time periods in your forecast.

Performance Analytics
 1 Week2 Week3 Week4 Week5 Week6 Week
Forecast 192%90%77%61%57%51%
Forecast 296%87%79%65%54%
Forecast 395%89%75%60%
Forecast 494%91%76%
Forecast 593%81%
Forecast 695%

The table above shows the actual versus analysis we’ve carried out on each forecast period, for each of this year’s six forecasts. The numbers highlighted in red are the accuracies we’ve calculated this week using this week’s actual cash flow data.

How is this analysis used?

Performance Analysis shows trends in forecasting accuracy. If we have information to hand that shows us how good we’ve been at forecasting in past, we’ll have far greater confidence using current forecasts to make decisions. For example, we can see from the analysis above that we consistently forecast, one week into the future, with about 95% of accuracy and, two weeks into the future, with about 90% of accuracy. As a CFO or Treasurer, this then allows you to make cash or debt management decisions two weeks into the future with a high degree of confidence.

On the other side of the equation we can see that the accuracy of forecasts decreases significantly around the three to four week mark. Using the results generate by this Performance Analysis we can approach business unit controllers with proof that their forecasts have been consistently inaccurate or use it to alter our own forecasting assumptions.

Performance Analysis provides the basis for both more confident decision making and accuracy improvements. It should be carried out by anyone managing a forecasting process.

September 28, 2015

EuroFinance iPad Winner

Following another enjoyable EuroFinance conference we are delighted to announce that Jesper Nielsen-Terp, Head of Treasury at Danske Commodities won the CashAnalytics draw for the new iPad Air.

Jesper was drawn from over 300 entrants who  visited the CashAnalytics stand over the course of the three day event.

September 02, 2015

EuroFinance 2015 Copenhagen

CashAnalytics will once again be exhibiting at Europe’s largest Treasury event, the EuroFinance International Cash and Treasury Management Conference. This year’s event will be held in Copenhagen and runs from 23-25 September.

We are delighted to be exhibiting alongside some of the world’s largest banks, consulting firms and software companies at what promises to be an exciting event.

The core theme of this years EuroFinance conference is growth. Global competition, digital disruption and more stringent regulation has made it more difficult for corporations to pursue sustainable growth strategies. Speakers including José Manuel Barroso, Zanny Minton Beddoes and Stuart Rose a will discuss the many factors impacting the growth of organisations today.

CashAnalytics will be exhibiting from stand S24 in the main hall, drop by if you are interested in cash flow reporting, forecasting and liquidity planning. We will be conducting live product demo’s throughout the course of the conference.

You can find out more about the conference by clicking here.

CashAnalytics is a leading provider of cash forecasting and liquidity management solutions. Our customers range from mid-cap private equity backed companies to large FTSE 100 multi-nationals. You can find out more about our products and solutions here.



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