The drive to improve the accuracy of cash flow projections is pushing treasury departments and technology to the fore of strategic planning
By John Labate
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."