From the November 2008 issue of Treasury & Risk magazine

Bronze AHA Award Winner for Working Capital Management

Google

In mid 2007, as Google's treasury team began to establish foreign currency hedging operations and revise its portfolio investment strategy for cash balances, the company determined a need to forecast its worldwide cash generation in more detail. With rising foreign revenue, Google had to cope with rising foreign exchange exposures throughout the world, in particular its European operations.

To better hedge those exposures, Google modified its forecasting models to forecast cash flows 18 months out by currency. The project required a multifunctional approach. For example, the sales finance team committed resources to develop the long-term revenue forecast by currency. "We had forecasted revenue by country, advertiser or Web site but never by currency before," says Axel Martinez, assistant treasurer. "We use the same statistically driven forecasting methods, but now we have a different take on the data." The tax team was also involved in translating how Google's tax structures would affect future cash generation.

For a company with about 50% of its revenue denominated in foreign currencies, it was mission-critical to develop a foreign currency hedging program. "With all the volatility in the markets now, it has been incredibly valuable to have this hedging program in place," Martinez says. "To prevent over-hedging and to meet the demanding standards for accounting for derivatives, the forecast was designed to be conservative," according to Martinez. The company now forecasts, with a target confidence level of 95%, how much revenue Google will have in different time periods in various currencies.

The forecasts are also a valuable tool for tax planning and determining global cash investment strategy. "It's critical to our understanding of our cash generation," Martinez says. "It's an essential part of managing our working capital. We can now understand more clearly how capital investments, strategic business decisions and volatility in the capital markets can affect our long term cash flow generation."

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