7 steps on how to make Cash Flow forecast a success

| 15-02-2021 | Bas Kolenburg

Last year was a good example to remind organizations that cash flow forecasting is important, although, very little were prepared for the unprecedented, sharp and abrupt changes in turnover and cash flow due to the Covid-19 pandemic.

CFO’s have been asking:

  • Where is the cash?
  • Are we prepared for all the contingencies?
  • Do we know how our cash flow will hold up for the rest of the year?
  • Will we meet the covenants set in our credit facilities?

In many treasuries, cash flow forecasting is a well-established basic core process, but from my experience it is often a “struggle” where the results do not always outweigh the efforts. Why is this process so difficult and more importantly: how can you make the cash flow forecast process a success?

Here are 7 steps that will help your organization:

1. Set your purpose and the horizon

Allow yourself to describe what the purpose of the cash flow forecast is as this will define also the horizon and the data that you need to build your forecast. The purpose will also be the guiding framework what level of tolerances you are prepared to accept.
Setting up a cash flow forecasting for quarterly reporting of covenants or to prepare for short term liquidity shortfalls means a different horizon and sometimes also a different set of data. Horizons can vary as much from the ‘standard’ 13-weeks to monthly or quarterly to even years. With a longer horizon, the level of accuracy will diminish.

2. Identify the cash flow drivers

This is the most essential and valuable step in the process as the right identification will largely determine the success of your forecasting.

    1. Where and when do we receive cash inflows and what will be our expected cash outflows?”
    2. From what sources can we derive the data, how predictable are they, in what currencies?
    3. And in which entities or what bank accounts will these cash flows occur?

Prepare a list of all (forecasted) cash in- and outflows and label them with priority, currency, predictability and identify in what entity and from what source you will be able to find actual and forecasted data.

3. Collect systematic and consistent data from all cash flow drivers

As you have, in the previous step, identified what will drive your cash flow, then we reach the really difficult part and that is obtaining reliable data on actuals and forecasts on these drivers.
You often hear : “I do not know when our clients will pay our invoices” and “If we win the tender then contract turnover will be X, however timing of the tender and outcome is unsure” and “Forecasted volumes of our product, I can give you but prices will be determined at the sale on spot basis”.
Don’t confuse sales and profit with cash. Most organizations seem very well equipped and organized to close each accounting period their books and forecast somehow the main profit and loss items going forward, however translating that into cash items, in the right currency with the right timing is not always easy.

My experience is that the process of obtaining these data gives you great insights on how cash driven the company really is and what role cash is playing in the KPI and rewards throughout the organization. You will often find that cash is, except for the treasury responsible, not on top of each minds.
Find also the right balance in detail of the data you want to forecast, as you can define a lot of cash flow categories, but that also means that you will need to label your actuals for all these categories. Manual labelling is often undoable (unless you have unlimited resources) and automating this labelling with tools is often easier said than done.

4. Focus on cash balance visibility

Your starting point for your cash flow forecast is the cash balance you have today and without adequate cash balance visibility on your today’s cash balance you will not be able to project future cash balances. Cash visibility means that you have access to – real time- information of all cash balances in your organization. When you have 1 or 2 banks, the Electronic Banking tools of these 1 or 2 banks will provide you all the information that you need. However, often certain bank accounts are managed on a decentralized level and information on these accounts are provided only at the close of the reporting period. Multi-banking tools that function as an information overlay can help you to overcome these kind of situations but you can also set up you own cash balance reporting consolidation.

5. Include analysis for variances

Analyzing the actuals versus your forecasts gives you a better insight how well the predictions have been and which data were reliable in the previous forecasting period and which were not. The sources that provided these data need to receive feedback on the variances from you to understand what was causing this difference so that their data can be improved going forward. Otherwise, it is only your problem. Sometimes a sort of “carrot and stick” feedback can be used to strengthen the reliability of the data collecting and create co-ownership for the process.

6. Prepare for scenarios

For treasurers, being prepared for the unknown is part of their DNA. So setting up scenario’s next to a base case in the cash flow forecast is essential to understand the headroom and even more important, what are the main drivers affecting the headroom. Because one thing is certain: Covid-19 will not be the last crisis they we will face.

7. Let systems work for you

There is no one-size-fits-all solution. Each process and tool must be tailored to the needs and objectives of each specific business. Many organizations work with Excel sheets because of the flexibility, it’s easy to use, the low costs and because it can manage massive amounts of data. Basically there is no problem with that, except when you would like to follow the steps, I described above, in more complex and multi-currency environment, then Excel will fall short to “let systems work for you”.
Nowadays there are multiple solutions (in various price ranges) for tools that can support your cash flow forecasting process from dedicated cash flow forecasting tools to more generic treasury systems and also payment hubs and banks provide (parts of) the solutions to support the cash flow forecasting process. Sometimes the tools include also artificial intelligence features that use actual company data to determine and support the forecasts. But often the tool is just a blank template sheet that needs to be filled with the actual and forecasted data. Then the added value is limited as “garbage in” means often also “garbage out” .

Conclusion

My advice is to revisit the cash flow forecast process in your own organization with the above mentioned 7 steps. If not ideal, there might be a strong business case to change (parts) of the process to be better prepared for the future.

 

 

Bas Kolenburg

View my profile

 

 

 

Trending treasury topics from the Treasury Barometer 2019

| 29-11-2019 | Enigma Consulting | Bas Kolenburg

While the treasury has always managed changes in both financial markets as in the businesses, the pace at which changes now need to be managed is accelerating. In a time of increased digitalisation, payments acceleration and new business models in the whole value chain of payments processes and bank connectivity, treasurers are becoming increasingly keen to leverage on the opportunities.

Treasury Barometer – the report

In the 6th edition of the Treasury Barometer, developed by Enigma Consulting and Rabobank, the trending topics that are shaping the treasury in 2019 and beyond have been explored drawing on feedback from the survey held in mid-2019. This report presents the latest trends and developments and provides a unique and representative understanding of the Dutch corporate treasury landscape.

The Editor Panel consisting of 6 members of the Dutch treasury community,  set the direction of this year’s Treasury Barometer and to monitor the quality and relevance of the content. The 4 content-interviews were again a great added value to the results of the survey, as they gave more insight into the subjects.

Trending treasury topics

This year’s edition walked readers through many of the hot topics that the treasury face nowadays.

Fraud & Cybercrime

Fraud & Cybercrime are actual trending topics as the treasurers are still trying to find the right responses to the increased cyber and (payment) fraud activity, advanced technology techniques and social engineering that is being used nowadays. Although an astonishing 82% treasury departments have been a victim of attempted or actual payment fraud/cybercrime, only 5% of the fraud (attempts) are being reported to the police. People seem to be afraid to be open about the fact that this happened to them so that it will be difficult for the police to solve fraud cases committed by large scale operating gangs.

KYC requirements

Because of the focus on anti-money laundering (“AML”) and the financing of terrorism (“CFT”), there is a lot of pressure on financial institutions to meet their compliance expectations, being forwarded to their clients in the form of increased KYC requirements and more intensive transactions screening.
From all respondent , 91% see that the increased KYC requirements are hindering operational efficiency, the growth and the management of its business and even 24% of all respondents has considered changing banks due to bank-specific KYC processes.

LIBOR phase out

The LIBOR phase out effect will be temporary but will lead to a total rebuilding of the bank’s infrastructure which will be pushed through to their corporate clients, who are just beginning to become aware what is ahead of them. The Barometer reported that only 42% have performed an impact analysis and even 15% was not aware of the LIBOR phase out at all. Industry experts recommend that corporates perform an impact analysis and become operationally ready for the IBOR phase out as soon as possible.

Technology/Innovation

The instant payments schemes and new technology around the world are transforming treasury departments into a world of real time 24/7 liquidity, based on a shift towards more centralised control with local empowerment. With new business models in the whole value chain of payments processes and bank connectivity, banks are rapidly embracing innovations and developing fintechs. The adoption in treasury departments is a mixed bag with an increasing group of early adopters, but also a large group that has difficulties to steer away from current older technology and interfaces.

Treasury Barometer results

Sustainability seems to be established as a core value and has moved beyond the initial hype, but the results of the Barometer showed no increased activity.

Bas Kolenburg from Enigma Consulting concluded: “From this year’s Treasury Barometer, the Fraud, KYC, LIBOR and Technology/Innovation themes are clearly very much on the radar of Dutch corporate treasurers and we are confident that this year’s report is motivating and inspiring for treasury departments. We aim with the Treasury Barometer not to provide an one-way publication but that this will be part of a multi-stakeholder conversation with the Dutch treasury community. The invitation is therefore open for persons to be engaged in future editions of the Treasury Barometer”

The full report is available for download here.

 

 

Bas Kolenburg

Senior Consultant at Enigma Consulting

 

IBOR phase out – a serious challenge

| 17-9-2019 | treasuryXL | Enigma Consulting

For the last 40 years IBOR (interbank offered rates, including LIBOR and later also EURIBOR) have been a fact of daily life in the financial services industry. They have been the benchmark for lending, hedge contracts, current accounts, valuation models etc. for a long time till the regulators, central banks and market participants decided to seek alternatives as from 2012.

Besides the switch to new reference rates, it now seems that alternative rates will be fixed afterwards based on a daily fixing component while the LIBOR Rates are now published at the beginning of each interest period.

Transitioning to alternative rates and calculation methods will be challenging, and it will have serious implications for both financial institutions as their customers on how lending and hedge contracts are priced and how treasurers manage risks and their working capital.

Although a lot of about detailed timing and specifications of the new reference rates is still unclear, we strongly recommend our clients  to be pro-active and not to follow the ‘wait and see” approach as the impact is expected to be substantial and the demand for resources to support these changes will increase in the coming months.

Bas Kolenburg: “Although this transition seems to be in the distant future, now is the time to start preparing! The impact can be huge….”

Enigma Consulting support both financial institutions and their clients to adapt to these new market circumstances. For financial institutions, Enigma Consulting provides project management support for the migration activities and client communication. For (corporate) clients, Enigma Consulting is performing impact analyses, that result in an action plan/ heat maps for the short and medium term. These action plans can then be used to prepare the organization for the expected changes and communicate with internal and external stakeholders such as your banks, market data suppliers, TMS & other systems suppliers and accountants.

 

Senior Consultant at Enigma Consulting

Grensoverschrijdend betalingsverkeer is (eindelijk!) aan het verbeteren

| 20-03-2018 | Bas Kolenburg |

In mijn vroegere rol als Corporate Treasurer waren grensoverschrijdende betalingen, zowel binnenkomend van een klant of uitgaand naar een leverancier, een regelmatige bron van ergernis:

  • Het is een langzaam en weinig voorspelbaar proces dat meerdere dagen in beslag kan nemen en over vele schijven verloopt met correspondentbanken etc. ;
  • Het is een erg duur proces;
  • Je kan maar moeilijk interveniëren als het proces eenmaal is opgestart;
  • Het proces is weinig transparant wat betreft doorlooptijd en er is geen bevestiging dat het bedrag op de juiste bestemming is aangekomen.

De afgelopen jaren zijn er in het internationale betalingsverkeer veel vernieuwingen geweest. Deze veranderingen hadden echter vooral betrekking op het SEPA-gebied. Met de introductie van SEPA is het onderscheid tussen een betaling binnen Nederland of binnen het SEPA gebied, mits in Euro, vrijwel verdwenen. Bovendien is valuteren niet meer aan de orde en dienen banken betalingen snel op de rekening van de begunstigde bij te schrijven. Maar als we kijken naar betalingen in andere muntsoorten dan de Euro of betalingen buiten het SEPA gebied dan zijn de verschillen erg groot. Daar tariferen en valuteren banken de transacties nog wel degelijk.

Daarom is er vanuit SWIFT een initiatief gestart dat moet zorgen voor een inhaalslag om ook grensoverschrijdend betalingsverkeer naar een hoger level te brengen: het Global Payments Initiative (SWIFT GPI).

SWIFT GPI streeft ernaar (uiteindelijk) alle hiervoor genoemde ergernissen in het betalingsverkeer op te heffen/te verminderen, om te beginnen met de volgende kenmerken in fase 1 (dat inmiddels sinds januari 2017 live is):

1. Snellere – same day- verwerking van de betaling.
Waarbij dus geen valutering meer wordt toegepast.
2. Transparantie van kosten.
Dus duidelijkheid over alle ingehouden kosten door banken in het gehele proces
3. Transparantie van het proces via tracking en tracing.
Door het toevoegen van uniek E2E (end-to-end) tracking nummer aan de betaling is er de mogelijkheid om een betaling van begin tot eind te volgen en te zien waar de betaling zich bevindt. Een betaler krijgt ook een bevestiging wanneer het geld op de rekening van de begunstigde is bijgeschreven. Hierbij blijft de omschrijving die de klant de betaler aan zijn opdracht meegeeft intact, dus zijn er geen aanpassingen van de tekst in de keten.

De voordelen van dit initiatief voor de Corporate Treasurers zijn talrijk:

• Minder settlement tijd van de inkomende en uitgaande betalingen;
• Betere en meer betrouwbare cash flow management;
• Meer inzicht in de kosten die worden gerekend voor grensoverschrijdende betalingen;
• Minder FX risico;
• Zekerheid voor betalers en ontvangers.

Op dit moment zijn al circa 150 banken wereldwijd aangehaakt bij dit initiatief en de verwachting is dat de meeste banken vanwege de klantbehoefte, zich snel willen gaan aansluiten. Daarbij geldt wel dat banken zelf aan kunnen geven in welke muntsoorten ze deze dienstverlening gaan ondersteunen.

In fase 2 (die is gepland voor 2018), zal SWIFT GPI nog meer functionaliteiten toevoegen:
1. De mogelijkheid om een betaling direct te stoppen
En dat ongeacht waar in het proces de betaling zich bevindt, bijvoorbeeld in geval van fraude of een dubbele betaling.
2. Het bijvoegen van documenten met betalingen
Documenten zoals bijvoorbeeld facturen en compliance documenten kunnen dan worden bijgevoegd en hoeven dan niet meer (zoals nu) via e-mail en andere handmatige acties naar elkaar te worden doorgestuurd.
3. Het invoeren van een “payment assistant”

Hiermee moeten bedrijven geholpen worden om alle gegevens die nodig zijn voor een grensoverschrijdende betaling nog beter aan te leveren zodat een transactie snel en efficiënt door de keten gaat. Bij Nederlandse banken zit in de huidige applicaties overigens al veel features die afdwingen dat klanten de opdrachten zo volledig mogelijk aanleveren.

In een volgende fase wil SWIFT GPI ook nieuwe technologieën, zoals Blockchain, verkennen waarbij uiteindelijk het doel is om de kosten voor de grensoverschrijdende betalingen verdergaand te reduceren.

Al met al is dit een erg positief initiatief van SWIFT om het grensoverschrijdend betalingsverkeer (eindelijk) naar de 21e eeuw te brengen. Nu is het zaak ervoor te zorgen dat zo veel als mogelijk banken zich hierbij aansluiten want als de bank van je tegenpartij niet aan dit initiatief meedoet blijven grensoverschrijdende betalingen een bron van ergernis.

 

 

Bas Kolenburg

Senior Consultant at Enigma Consulting

Will the next Treasurer be a (mobile) computer?

| 27-9-2017 | Bas Kolenburg |

It’s in the genes of Treasurers to look ahead, to predict what will be around the corner and to anticipate on the icebergs that your company may hit in the future.

But what about the forecast of the position of the Treasurer itself? Buzzwords these days are disruption, digitization, blockchain, outsourcing, 3D printing, how computers and robots are transforming whole value chains and are taking over ’our’ jobs. So why not replace the guy or girl in “the ivory tower” who is negotiating with banks, takes care of the bank accounts and manages the financial risks of the business? Will there be a disruptive event or technological development that will replace the human Treasurer in the future?

In short my answer is no, but I am certain that the function of Treasurer will be materially different form current and recent historic practice.

Look what already happened between for instance the 1980s till now and how new developments and technological improvements changed the daily life of the Treasurer. Can you imagine to be a Treasurer in the 1980s without a computer trying to generate a daily total cash balance to your CFO adding up all paper daily statements in various currencies on a manual basis? Or running a cash pool notional or physical with frequent cash sweeping combining decentralized entrepeneurship and central grip on cash? Or try to have decent discussion on the cash conversion cycle with all relevant stakeholders and trying to improve the supply chain from a stack of paper sheets?

So in the last 40 years the life of a Treasurer changed already rapidly and dramatically. And that in a world where significant risks and volatility seem to be the new world order. The risks are plentiful: volatile commodity prices, geopolitical changes, higher debt levels, negative interest rates, liquidity bubbles created by central banks to name a few.

But what is ahead of us? I think that the human Treasurer will be there, for a while, for a number of reasons.
1. Systems need to be implemented
In my treasury experience I have not found a single system that was ‘plug and play’. It takes time, funds and resources to get systems do what they need to do. Try to set up a decent TMS within a month? Will be hardly possible.

2. Systems need to communicate with eachother
In a ideal world you have your ERP(s), TMS, trading platform, payment tools, connections to the bank, reconcilation of bank statements working as if it was one system to be managed via one set of buttons. Reality is that all the systems have interfaces that can be complex and need human interference to manage the exceptions from normal practice. I have seen in my career a lot of excel sheets used to manage these interface connections and they are difficult to delete completely.

3. There is no standard business
Very little corporates can say that for the next 10 years or so business, product mix and client base will be the same. So supporting business with the financial risks will need to be customized tailor made as there is no ‘one size fits all’. Although in the future there will be more powerful information tools available to make the right decision.

4. You need to navigate through the wave(s) of regulation
The credit crisis has caused that new rules are introduced almost on a weekly basis. Non compliance to the rules can lead to business disruptions, fines, sanctions and improving transparancy is pivotal to manage these regulations. Humans need to navigate through these regulation jungle.
The stacks of paper required for KYC and anti-money laundering are increasing by the year and it is up to the Treasurer to manage these processes as efficiently as possible.

5. It is key to have access to funding in support of your strategy, business and organisation
Corporates are looking for a more diversified funding base as banks have retrenched from their dominant position from the past. That means that the Treasurer has these days more sources of funding available such as alternative lending, working capital via supply chain financing, foreign capital markets. More sources lead to more complexity which needs human interference to select the best option(s). And although your KPI sheet and fancy business plan can help you with a certain small crowd funding amount, securing financing is still a result from relationship between a financier and a corporate in need of funding.

 

 

Bas Kolenburg

Senior Consultant at Enigma Consulting