From the June 2012 issue of Treasury & Risk magazine

Best practices in liquidity management: Ten cash flow forecasting do’s and don’ts

As every treasurer knows, no discussion about liquidity management is complete without addressing cash flow forecasting. Today, as markets continue to gyrate, liquidity management and risk assessment remain both top of mind and part of business contingency planning, for treasurers and corporate boards alike. In fact, two thirds of respondents to the most recent AFP Liquidity Management Survey cited improving cash forecasting as one of their top priorities for cash and liquidity management.conditions has become a greater priority.

There is no silver bullet to improving cash forecasts. However, certain actions can be taken, and others should be avoided, to get a clearer, more reliable picture of cash flow dynamics across the organization.

1. Do establish a defined process with clearly defined owners, and get buy-in. Get the right level of cooperation and make clear the organizational benefits of forecasting. Take the time to educate stakeholders and provide them with feedback on the results of their cash flow forecasts.

2. Don’t let everyone define their own source of information for the forecast. Know the sources of information and clarify how data is to be constructed so that you can further assess the quality of enterprise-wide, consolidated forecasts.

3. Don’t waste time perfecting templates. As silly as it sounds, putting together useful forecasting reports often gets mired down in aesthetics, such as which items to physically highlight or put in bold type. While reports must be easy to use and read, the real focus must be on getting the content right, including line items, categories and time horizons, for example, and providing reliable information.

4. Do initiate projects that will simplify the cash flow forecasting process. Initiatives such as streamlining bank accounts and relationships yield economies of scale and also speed up data collection and cash forecasting processes.

5. Don’t ask the business units to prepare the full forecast for their entity. Break down your forecasts on a line item basis and identify the best source of content for each. For example, businesses will excel at providing revenue drivers, local trends and direct expenses. But procurement may be a better source for the timing of payments to be released under contractual obligations.

6. Don’t be satisfied with a top-down approach. Although it is more time-consuming, getting input on business trends and market activity at the local level to build bottom-up forecasts yields better results. Delve into activities at the business level to understand what is causing or will cause changes in them and combine top-down and bottom-up approaches to forecasting.

7. Do automate. Technology is your friend. Put the right processes and systems in place to aggregate and report data enterprise-wide. Companies often have difficulty getting a realtime view of their cash positions and perform cash flow analytics without a global enterprise resource planning system or treasury management system. However, online treasury portals such as Citi’s TreasuryVision™ provide multi-bank data aggregation and reporting plus forecasting and analytic tools. TreasuryVision can be used as a standalone solution or as a complement to existing ERP and treasury management software platforms, making it easy to jump-start cash visibility initiatives while waiting for a large-scale single backbone solution to come online.

8. Do benchmark. Learn from peers that have gone through similar experiences. Take advantage of benchmarking studies and tap information available through practitioner groups.

9. Do perform stress testing and scenario analyses. Move beyond developing a picture of cash access under normal conditions and develop “what if” challenges to analyze the impact of events and disruptions on your company’s cash position.

10. Never be entirely happy with your forecasts or processes. Build in continuous improvement. Constantly search for ways to improve the quality of data and to reduce variances.

Bottom line, treasurers equipped with reliable data, and sound insights, policies and technology, are in the best position to understand, manage and measure their company’s cash position and mitigate related risks.


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