Think having excess cash on hand to smooth out the bumps in your forecasting really doesn't matter much in a world of rock bottom interest rates? Then talk to Jim Burns, general manager of treasury for the $920 million Chicago Transit Authority, the second largest public transportation system in the U.S. Before Burns led an overhaul of the CTA's treasury department, the office had lost control of the ins and outs of payments throughout the organization.
That all changed when the CTA installed a new ERP system from Oracle Corp. last year and Burns, with the help of its off-the-shelf treasury and cash management modules, went to work reorganizing. Now, helped by the system's flow of information into and out of treasury, Burns is better able to match future assets and liabilities, and says he has the confidence to put his spare cash to work. "We've been able to lengthen our maturity and capture some more yield. Where we were doing overnights or two-days, now we're able to go out maybe three weeks to a month and pick up three, four, five basis points on our investment portfolio," he says. The benefits don't end there. Burns says his office has also been better able to use its cash to improve its relations with key community vendors, making faster and sometimes earlier payments to the many small, minority-owned start-ups that provide the CTA with construction, janitorial and other services. "Being a local entity, we have a commitment to the community. More jobs created at the local level should translate into more ridership now and in the future," he says.
In the dog-eat-dog world most companies operate in, of course, helping to keep small suppliers afloat hardly translates into a key strategic use of cash. They face situations more like that of Entergy Corp, the $9.2 billion power and utility group. Better forecasting management has allowed the New Orleans-based company to rely less on outside sources to finance a string of recent acquisitions. "We bought four Northeast nuclear facilities in the last three years, and each one has gone a bit better than the last, with a better handle around cash flow forecasting and other treasury related tasks," says Entergy's finance operations center manager Steve K. Myers.
Cash may be king again, but to many financial executives the art of projecting it into the future with any kind of certainty remains deeply mysterious. What more and more companies are finding, however, is that reliable forecasting can open a range of strategic opportunities that exist far outside the traditional boundaries of treasury office operations. "Treasuries have been forecasting cash for decades, but the focus was on the amount of cash available or if there was a deficit position," says David O'Brien, assistant treasurer at Electronic Data Systems Corp. "Treasuries are [now] being asked to get involved in forecasting cash flow, beyond the treasurer's liquidity forecast. It is a substantial value-add, and it brings treasury to the forefront."
The benefits of better forecasting can include lower borrowing costs and the ability to pay down debt, a reduction in a company's financial exposures to currency and interest rate swings and even an improvement in a credit rating. What holds many companies back, however, is a failure in setting an organization-wide mandate that emphasizes good forecasts and an inability to gather the necessary information on payments and receivables that are the basis of a dependable projection. "A lot of companies fail to understand the objective of cash flow forecasting," says Onkar Liddar, a manager of finance and performance management services at Accenture. "It should give value to an organization, not just checks and balances, but as a source of material that will add to a competitive advantage."
No one understands the proper role of forecasting better than Cisco Systems Inc. You might think with $19.8 billion in cash and marketable securities on its balance sheet, the company could afford to focus on other matters, but as in all areas of competition and finance, Cisco doesn't miss an opportunity. "We believe the ability to forecast cash is one of the primary outputs of treasury," says David Holland, Cisco's treasurer. "We spend a lot of time on issues that become evident in the cash flow forecasting process, matching actuals to forecast and working that back through the organization to determine where the friction is in the system." Such a focus can identify problem areas, such as difficulties in the collections process, which can lead to missed forecasts and late quarter surprises.
The Buck Starts Here
Technology vendors, including ERP systems makers like SAP, Oracle and PeopleSoft, and numerous best-of-breed providers that specialize in more advanced analytics, have sharpened their forecasting tools in recent years. They are helping companies organize their far-flung reporting operations to produce more timely snapshots of current cash and projections of future flows. The right technology can be key, but finance executives and analysts are quick to point out that it is no magic bullet. The best technology is only as good as the inputs.
There are many approaches to managing cash flow, but perhaps the most helpful for most companies trying to rethink their approach is the "bottom-up" or "direct" technique, which focuses on the ins and outs of cash. The goal is to have the right information at your fingertips, and that tends to start with the often labor-intensive job of coming to terms with how a treasury office fits into an organization. Is the treasury given the ultimate responsibility to come up with accurate forecasting, and if so, is it at the center of informational flows on cash decisions, inflows and outflows between all business entities? Getting there, especially at smaller companies, may involve turf battles for payment and process information that is vital for getting a handle on what your cash position really is at any point in time. Just as key is that the focus on achieving accurate cash flows resonate from the highest levels in a company, at times even from the boardroom.
Large multinational corporations, of course, can't afford to be slack when it comes to cash needs. The process is always evolving, however. Accuracy in its cash flow outlook has long been important at General Motors Corp., but that emphasis has become even greater in the last three years, according to GM's former assistant treasurer Sanjiv Khattri, who was recently promoted to CFO of General Motors Acceptance Corp. When the company's credit rating began to suffer on concerns about its balance sheet and ability to fund its pension obligations, GM's CFO John Devine turned to cash management to generate new value. "We are basically running the company's financials now for earnings and cash flow," says Khattri. "There is a significant improvement in what I would call the layers of the onion. We have a certain level of cash flow, but where did it come from, how did it come, how much is pure operating, how much is financing? [There is] a significant focus on that."
Understanding the many factors that influence a cash balance at any one time, executives say, involves a deep knowledge of the macro and micro factors that can trigger changes in sales and costs. The point is to identify those events that may be less easy to predict than others and pay close attention to them in order to minimize the impact of sudden, late surprises. "We like to tell companies to look at the business drivers that go into the business plan, as well as the assumptions behind those drivers, like what impacts the volume of sales during the forecast period," says Robert Baldoni, partner and head of global treasury advisory at Ernst & Young. "Those drivers are usually not visible to treasury folks. But by treasury including the impact of these drivers in the analysis, they are able to give CFOs a better understanding of variances in cash flow forecasts and provide an early warning indicator in preparing analysts for missed or exceeded forecasts."
There are other data sources that can prove valuable. "Working capital management, or forecasting, starts with your banking structure, in my opinion," says EDS' David O'Brien. "Because of the structure of our banking system, we are able to get a very decent appreciation for receipts, disbursements and payroll from a top-down perspective. And we are able to take that information and pattern it in order to anticipate seasonality within weeks or quarters, and we are able to translate that with a certain degree of success into a forecast."
Given that forecasting quality hinges on fast and accurate information flows, ERP software vendors are making inroads with many companies looking to manage the process better. "Cash and liquidity management is the number-one focus of our customers who want to expand their treasury functions," says Philip Say, solution marketing manager at German software maker SAP AG. SAP's recent offerings allow a user to aggregate cash flow information into a single data warehouse, including A/P and A/R, and then aggregate that with data from a bank statement. New modeling and analysis capabilities have also been added. In recent months, Oracle Corp. has added several new features to its cash management treasury tool that are meant to add more flexibility to the process of keeping track of flows on an operational level. With Oracle's E-Business Suite of enterprise applications, a company can run cash and forecasting analytics from a single information source or database, on a real-time basis. At PeopleSoft Inc., the system approach is designed around a highly modular suite of cash tools, in an "end-to-end" cash management design that allows customers to select those ERP functions they most need. Longer-term forecasting tools focus on analytics, business planning and budget needs, while shorter-term functions can help a company to maximize its return on cash generated.
For many companies, the analytics and modeling capabilities of ERP are not robust enough, and they turn to forecasting specialists in the business performance management (BPM) software segment. When considering such a best-of-breed forecasting tool, it's important to remember that most need to sit on top of an existing data flow system, whether it be a mainframe, legacy or ERP system. A leader in the specialty space is Hyperion Solutions Corp. The company's off-the-shelf Strategic Finance software includes several advanced features, such as setting collaborative management cash flow targets and producing what-if analyses based on variable factors and then predicting the impact on a company's bond or credit rating based on factor fluctuations. For those who think long and hard about cash matters, Hyperion's software allows for a variety of measurement techniques, such as free cash flow, or focusing on just the operational cash flow, without the need to change the underlying data sources.
Meeting The Forecasting Demand
Another feature shared by most best-of-breed forecasting software is the ability to link easily and interact with multiple vendor ERP systems within the same company. Four years ago, Paris-based software group Cartesis SA launched a U.S. subsidiary for its tools group, and it currently has 72 clients in the U.S., including AT&T Corp. The group's Magnitude product sells mainly to large multinationals and it specializes in predictive analytics techniques that focus on smoothing out a company's internal transactions among multiple entities, as well as complex currency impacts that can often cloud a cash outlook. The system is also designed to break out currency effects on a country-by-country and even region-by-region basis. Since it is modular, as many such systems are, Cartesis sells simplified versions of Magnitude at lower cost to companies with less need for tracking cash on a global basis.
To a great extent, the corporate scandals of the last few years have forced all companies to take a long, hard look at their reporting and business metrics, cash included. But no matter the reason, tackling the forecasting monster can unlock unrealized potentials for any company through better cash management. Although the benefits start with a better return on your dollars, that is clearly just the beginning.