Cash ManagementTreasury Management
Treasuries come to regard long-term cash flow forecasts as worth the effort
At Greensboro, N.C.–based Syngenta Crop Protection Inc., there was no tradition of cash flow forecasting. Syngenta was a small subsidiary of pharmaceutical giant Novartis AG until 2000, when the manufacturer of fertilizers, pesticides and herbicides was spun off with its parent, Syngenta Corp. Now, however, its value to its parent is in the cash it generates and not so much its growth potential, and you'd better believe that perfecting cash flow forecasting jumped to the head of its finance priorities. "Back [with Novartis], we were a small fish in a big pond," concedes Bert McCuiston, head of credit, receivables and cash management. "Now, we're a third of the global business of a $6.5 billion company, and how well we forecast matters a lot."For Syngenta, thanks to the very long cash conversion cycle of its 5,000 farming customers, the cash forecasts with the most relevance for planning are long-term forecasts, and the unit now produces four-week, four-month and one-year forecasts. Like many companies with smaller treasury operations, Syngenta turned to software and consultants for help.
THE RIGHT TOOL
On the collections side, McCuiston bought the Emagia Corp. collection- and receipt-forecasting tool. For large, extended payments, McCuiston can download payment information from the A/P files of its major customers into the Emagia software and see on exactly what date the customer has scheduled a payment. If an invoice is not scheduled or is marked as disputed, he starts working on that one before the payment is due. "We used to forecast aggregate cash, but now we can drill down to specific customers," McCuiston says. "It's a lot more detailed, and [Syngenta's] treasury really appreciates that."
The disbursements side has proved more problematic. Currently, McCuiston is working with SAP consultants.
In 2004, McCuiston was able to cut in half the frequency with which forecasts missed their mark, down to around 14%. "Most months, the variation is under 10%," says Henry Graef, the parent's treasurer, "and that directly translates into more effective borrowing and investing. We don't over-borrow nearly as much now."
According to McCuiston, the exercise has put the subsidiary on the parent's radar screen. "Nobody from treasury asked us to do this, [but] it's elevated our position with treasury," says McCuiston. "They came over to see what we've got. We've got better numbers but we also have a better relationship with treasury." Another big benefit: Syngenta has managed to pay off its debt earlier and raise its debt rating.
Cash flow forecasting projects do not always pay off so quickly, but there's no doubt it takes less effort to sell them these days. "It's gone from nowhere to the top of the charts as a management priority," says Philip Say, director of solution marketing for MySAP ERP financials. "Planning is now a three-dimensional exercise. The result is longer, more accurate forecasts and therefore smarter decisions by treasurers and by management in general."
TOO MANY MOVING PARTS
But just because executives seem ready to green-light forecasting projects doesn't mean they're a snap to pull off. In fact, even at the best treasuries, cash flow forecasting—particularly when you get into long-term forecasting—is still considered dangerous territory by most treasurers. The problem: There are an awful lot of variables that can derail an otherwise perfectly reasonable forecast. "Short-term forecasting is like looking out the car windshield to see which way the road is turning. Long-term forecasting is like looking at a road map," says consultant Craig Jeffery, managing director of Atlanta-based Strategic Treasurer LLC. "The farther out you go, the more it becomes an art rather than a science."