From the September 2015 Special Report issue of Treasury & Risk magazine

A Clear View of Cash

Volatility in the forex market, the prospect of higher rates and the effects of Basel III are all encouraging companies to get a better handle on their cash flows.

Treasury departments never stop focusing on cash forecasting, but sometimes it ranks higher on their list of priorities. This is one of those times, as factors ranging from volatility in the foreign exchange market and the prospect of higher interest rates to the effects of Basel III regulations renew companies’ interest in having an accurate outlook on their cash flows.

Paul LaRock, a principal at consulting firm Treasury Strategies, noted that cash forecasting was a bigger concern for corporates before interest rates fell when the financial crisis struck in 2008. “When interest rates fell, the priority of cash forecasting dropped dramatically,” he said. “There wasn’t any point in doing it because you couldn’t affect interest earnings by doing cash forecasting.”

But the topic started to get more attention in the middle of last year when the foreign exchange markets saw a pick-up in volatility, LaRock said.

“Many large companies with international operations wanted to start doing foreign exchange cash-flow hedging,” he said. “To execute that kind of hedging to protect yourself against swings in currencies, you need good cash forecasting, and a lot of companies didn’t have that.”

“The foreign exchange variable is more significant this year than it has been previously,” said Bob Stark, vice president of strategy at Kyriba, adding that a number of U.S. companies saw hits to first- and second-quarter earnings this year as a result of forex moves. “So some organizations that didn’t hedge, or didn’t hedge a high portion of their cash flows, they’re realizing it’s a big driver.”

Cash forecasting got another boost when the improving economy suggested that a Federal Reserve rate hike was likely. If the Fed starts to raise short-term rates, short-term investments may start to offer worthwhile returns to companies, making it worth their while to fine-tune their forecasts to maximize those investments.

Higher interest rates will also have an effect on companies’ borrowing, Stark noted.

“There’s big anticipation that borrowing cost and availability will be affected,” he said. “It may also mean banks’ interest in lending may go down. That again requires a certain amount of planning to be confident about what you need,” given that over-borrowing will entail a higher cost.

Lisa Rossi, global head of liquidity and investment products, Global Transaction Banking at Deutsche Bank, noted that for companies operating in Europe, negative interest rates in countries like Switzerland and Denmark and in the eurozone have emphasized the importance of company decisions about where funds should be maintained.

“Do you want your liquidity to be in an interest-earning currency or a negative-interest currency?” Rossi said.

That question highlights the importance of visibility into the location of a company’s cash and its inflows and outflows, she said. “Banks are responding by providing improved liquidity details, additional reporting and greater options for automated global cash concentration structures. The enhanced services will allow treasurers to make the important decisions—whether to hedge, which base currency to maintain and where.”


Impact of Regulations

Going forward, new Basel III requirements on banks’ reserves will also highlight the importance of companies’ having a good grasp on their cash flows. Among the capital requirements banks now face is the liquidity coverage ratio, which looks at their funding over a 30-day liquidity stress scenario and encourages them to rely on cash that they can count on for that term. The liquidity coverage ratio is lessening banks’ interest in companies’ non-operating cash and making operating cash more attractive, since it’s perceived as less likely to flee in times of stress.

“We as a bank are looking for longer-term stress-compliant funding. We prefer more stress-compliant funding that supports the new regulatory environment such as the liquidity coverage ratio as opposed to overnight funding that has limited value in the new environment,” Rossi said. “That is going to have an impact on the treasurer’s decision and potential yield opportunities.”

Lisa Rossi, Deutsche Bank


What is going to be expected
in the market now for a treasurer
is to manage their short-term
idle cash–under one year–more

—Lisa Rossi, Deutsche Bank



“Corporates require improved visibility into their short-term investments and their maturity profile in order to manage operational cash and maximize interest potential,” she continued. “What is going to be expected in the market now for a treasurer is to manage their short-term idle cash–under one year–more effectively.”

Banks are responding to the liquidity coverage ratio by rolling out products that ask corporates to commit funds for at least 31 days.

“As more companies utilize more of those types of investments, by definition they have to be good at forecasting,” LaRock said. “Otherwise they’ll put too much into those investment vehicles.”

Stark said that while the liquidity coverage ratio’s time frame puts an emphasis on short-term forecasts, the yield curve is not completely flat. Given that companies can earn a little more return if they’re able to invest for 60 or 90 days, there’s an interest in being able to forecast accurately for that period.

Meanwhile, the interest in hedging foreign exchange exposures means companies need to be able to look out over longer periods. “You don’t want to be hedging [foreign exchange] for 30 days, you want to be hedging six, nine, 12 months,” Stark said.

LaRock said the greater focus on forecasting was evident in Treasury Strategies’ workload. “We have multiple forecasting projects underway with our clients right now. That was not true five years ago,” he said.

Craig Jeffery, managing partner at Atlanta consulting firm Strategic Treasurer, said the 2014 edition of an annual cash-forecasting survey conducted by Strategic Treasurer and software provider Bottomline Technologies, showed a “renewed emphasis” on cash forecasting.

There was a jump in the portion of companies that do cash forecasts daily, according to the survey of more than 100 companies. In the three years prior to 2014, the portion of companies that said they forecast on a daily basis ranged from about 30% to 33%. In 2014, that surged to 49%, Jeffery said.


Visibility & Aggregation

“Our experience with clients is that they all have processes in place to forecast their cash,” said Cindy Gerhard, global head of product management and liquidity management services for Citi Treasury and Trade Solutions. “However, the degree to which they are generating accurate forecasts varies widely.”

Among the prerequisites for an accurate forecast is knowledge of the cash balances in the company’s bank accounts.

Tracking the balance in every bank account on a daily basis is quite a chore for companies with multiple banking relationships and many bank accounts.

But there are various ways to tackle that. Some companies join SWIFT and use its messages to gather the data. Others go through a SWIFT service bureau to achieve the same thing, and some treasury software companies have service bureau units. Gerhard noted that many banks can gather the information about a company’s accounts at all its banks and aggregate that for the company.

Cindy Gerhard, Citi



Our experience with clients is that
they all have processes in place
to forecast their cash. However, the
degree to which they are generating
accurate forecasts varies widely.

—Cindy Gerhard, Citi



In fact, the survey conducted by Strategic Treasurer and Bottomline showed that in 2014, one out of eight treasuries were using some sort of aggregator to gather information from their banks, up from one in 10 in 2013. Jeffery called that “a fairly significant move,” and added that he expects the use of aggregators will have grown at least as much in the latest year.

Treasuries that use an aggregator lighten their workload, Jeffery said, although they may be paying more than they would if they used staff time or company technology to gather the bank information. Still, he said, “if I’m trying to get an accurate forecast, I need accurate information.”

Deutsche Bank’s Rossi noted that companies need more information than just their bank balances in order to put together a forecast. “They need to see when their investments mature and when they have large payments due so they can match that ingoing and outgoing payment activity more accurately.”

“I would say that many of our clients are looking more closely at their overall centralized position,” she added. “They want to see where they have cash deficiencies and where they see opportunities to invest. They have to look at all of the factors within the matrix of currencies, liquidity requirements and payment/receivable forecasting in order to maximize the best potential outcome.”



Historically, Excel spreadsheets have played a big role in companies’ cash forecasts.

But Stark estimated that among companies with revenues of $500 million or more, less than half still rely primarily on spreadsheets to do cash forecasting. Those that use other kinds of systems could still employ spreadsheets for some chores, though, he said. “It might be the right decision to use spreadsheets for a particular model that is difficult to key into a system.”

Companies using spreadsheets can find it challenging “because of the sheer amount of time and data” involved, Stark said, noting that a forecast may involve thousands of different line items and a number of different sources.

The company builds a forecast and then continually refreshes it with the latest data, “so it’s always this living breathing forecast,” Stark said. “It’s always an iterative process.” But he noted that that process requires a lot of manual work for companies that don’t use some sort of software.

Statistics from Citi Treasury Diagnostics show that while 94% of the bank’s corporate clients have a cash forecasting process, 80% of those companies have some manual input to their forecasts. “It could be limited to an occasional account balance update, it could be manual consolidation of spreadsheets,” Gerhard said. “But a pretty high percentage have some incremental manual input.”

One aspect that companies should consider when implementing a technology solution is its accessibility.

If employees in different parts of the world can access the treasury solution, then they can input data directly into the solution, instead of sending the information on spreadsheets to a central location where it has to be input, and the software can consolidate the information, Gerhard said. Not only does that save time, “it also allows you to leverage the technology to generate forecasts more frequently, spending your time analyzing results and improving accuracy,” she said.

LaRock said he sees a trend toward greater automation in cash forecasts.

“Many companies are not just defaulting to, ‘Let’s do the whole thing in Excel,’” he said. “Those that have treasury management systems want to do most, if not all of the forecasting within the treasury management system. Others who have robust forecasting within their ERP system are trying to utilize that. They’re trying to reduce the amount of manual effort in executing cash forecasts.”

Paul LaRock, Treasury Strategies



For any dynamic company, a forecast process
that works now is unlikely to work one year
or two years from now. You have to change
the way you manage and project data.

—Paul LaRock, Treasury Strategies




The Strategic Treasurer-Bottomline survey showed a significant increase in the portion of treasuries that said they were able to forecast accurately using their cash balances and accounts receivable and accounts payable information, to close to 25% in 2014 from under 15% in prior years’ surveys.

Jeffery linked that surge to a pickup in the number of treasuries that use direct feeds from their AR and AP systems in their forecasts. Just over half of companies said they used such feeds in 2014, which was a 10% increase over prior years’ readings, he said. “We would say the more you’re getting actual information, the more accurate [the forecast] is going to be.”


The Human Element

Forecasts rely not only on data from company systems, but information from other company employees, including those in procurement and sales, according to LaRock. “Inputs from those types of departments and individuals is incorporated into a cash forecast to make it more accurate,” he said, but noted that for treasury teams, part of cash forecasting involves building and maintaining relationships with those departments.

Gerhard also emphasized the relationship between the treasury and business executives.

“When you start to dig into improving accuracy, this is an area where I see a lot of attention, and a lot more opportunity for results,” she said.

But treasury managers have to work with the people in the businesses to improve the information they provide, Gerhard said. “Treasury is the one who knows the accuracy of the forecast they previously provided and can give them feedback, so they know where to look for information on ways to improve,” she said. “That’s important and often overlooked. [Treasury staffers] get focused on the math and projections, and they forget to engage the business managers to help them improve.”



Jeffery said analyzing and understanding the company’s business is “crucial” in accurate forecasting. “What are the normal flows, the seasonal flows, the cyclical flows?” he said.

Companies should also try to set up their banking structure in a way that improves their efficiency in terms of cash management, Jeffery said. “Your overall design for concentration of funds is done with a mind to efficiency of where the cash flow is, but also what your forecast will tell you, and how you can gauge that from the information that you have.”

LaRock suggests that companies that are just beginning to build a cash forecast should “start at the end and work backwards.

“You design the report that users are going to need to do their job,” he said. “Meet with people, establish rows and columns, and then ask yourself, ‘Where do we get the data to build the report?’”

When companies start work by looking at all their data, “you end up with reports that are not optimal for the end users,” LaRock said.


Feedback Mechanism

It is not enough just to forecast. LaRock said treasury should constantly assess the accuracy of the company’s cash forecasts in order to improve them.

“For any dynamic company, a forecast process that works now is unlikely to work one year or two years from now. You have to change the way you manage and project data,” he said. “I put a strong emphasis on variance analysis and a feedback mechanism.”

Bob Stark, Kyriba




The whole idea is to constantly improve.
If you don’t create a landscape that allows
for that improvement, your forecast is going
to be perennially subpar.

—Bob Stark, Kyriba



Companies can use a monthly variance analysis to identify problems in their forecasts, then make adjustments to deal with those problems, he said.

“Measurement is the most valuable thing,” Stark agreed. “The whole idea is to constantly improve. If you don’t create a landscape that allows for that improvement, your forecast is going to be perennially subpar.”


Read about the improvements made in cash forecasting by Dana Holding Corp., Dow Corning and McCoy’s Building Supply.

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