16-06-2022 | treasuryXL | Refinitiv | LinkedIn |
Demand for real-time data is growing fast as financial firms face regulatory, trading, operational and competitive challenges. Rob Lane, head of real-time feeds at Refinitiv, discusses the changing data needs of banks and buy-side firms and how the cloud is helping improve access to a key source of competitive advantage in pursuit of more informed and agile decision-making.
15-06-2022 | treasuryXL | TIS | LinkedIn |
This blog highlights the primary considerations that treasury and IT teams must make when determining whether to build custom in-house bank connectivity and payments solutions or contract the services and software of a specialized 3rd party vendor. After evaluating the main benefits and drawbacks of each option, we provide a list of helpful questions for practitioners to consider as they decide whether building or purchasing a solution best suits their needs.
In today’s remote and digitally operated business environment, it’s no secret that organizations have grown deeply reliant on technology to manage and automate their core treasury and finance functions.
Realistically, a “modern” company operating in 2022 will be doing business through a myriad of banks, accounts, currencies, and entities. They will also likely have hundreds or thousands of vendors, partners, and customers within their network. As a result, digital payments and cashflows are moving in and out of the business constantly, and every movement must be monitored and controlled by treasury teams that often consist of just a few employees.
Because of treasury’s limited personnel bandwidth, any issues with adopting the right bank connectivity and payments stack to automate their core operations almost always lead to excess complexity and manual strain. It can also result in significant security and compliance gaps, along with general inefficiency across crucial processes like transaction processing, liquidity management, balance reporting, and cash forecasting.
But while most treasury and IT groups today can agree that developing a robust connectivity and payments stack is critically important, each internal stakeholder will likely have their own idea regarding what the “best-fit” version of this technology stack actually looks like.
Why is this?
As companies grow over time, the systems they use to manage payments and connect with their banks must evolve accordingly. Because managing a few bank accounts and transactions in a single country and currency is a fundamentally different task compared to managing dozens of banks, hundreds of accounts, and thousands of payments across numerous countries and currencies, companies cannot rely on the same solutions and structure they’ve always used to sustain them as they scale.
Instead, in order to maintain compatibility with new payment formats and channels like ISO 20022 and SWIFT GPI, connect with regional payment networks like NACHA and EBICS, or accommodate custom bank connectivity protocols (Host-2-Host / SFTP, APIs, etc.), growing enterprises will inevitably reach a point where their existing payments and banking architecture must undergo a significant overhaul.
However, as this evolution occurs and internal stakeholders recognize the need to upgrade their connectivity architecture, disagreements often arise over which vendor or “type” of solution is the best fit. Given that there are hundreds of available 3rd party solutions that could potentially address treasury’s requirements, as well as a variety of internally developed applications that could be created and deployed by IT teams, it is common for different stakeholders to have contrasting views over which option is the smartest choice.
This is where the “Build vs Buy” technology argument most frequently comes into play.
As organizations recognize the need to upgrade their payments and connectivity capabilities, there are two main approaches they could leverage to address the issue. The first is to use internal IT resources and expertise to build a customized solution for treasury, and the second is to purchase a specialized solution from a 3rd party provider.
But which option is the best choice?
Let’s quickly review the key benefits and drawbacks of each option.
Organizations that prefer to create their own custom connectivity solutions internally using IT resources and expertise will likely have a greater ability to customize the offering in a manner that best addresses all their needs. To date, several prominent ERPs offer modules or plugins that give IT staff the ability to build custom formats and configure their own connectivity protocols. However, this option requires a significant amount of bandwidth and maintenance from treasury and IT teams, as well as a high degree of expertise and technical prowess to support the solution over time. The below pros and cons list highlights this reality in more detail.
PROS
CONS
Compared to building an internal solution, adopting a 3rd party connectivity and payments solution usually requires less of treasury and IT’s time, and there is less effort required to develop, implement, and maintain the solution. However, there is also the chance that this solution will require the purchase of redundant or unnecessary features. At the same time, improper or incomplete implementation of a 3rd party solution can cause severe integration, security, and compliance issues over time. More about these pros and cons are highlighted below.
PROS
CONS
As showcased by the above bullets, a company’s decision to build or buy its payments and connectivity solutions should always depend on its unique circumstances. For instance, a company with sufficient IT personnel and internal expertise might have the bandwidth to create and maintain a solution on its own. However, if treasury and IT teams are already exasperated with their current list of responsibilities and don’t have the time or expertise necessary to create and maintain their own solution, it probably makes more sense to begin evaluating the services of a 3rd party provider.
For treasury teams who are presently evaluating their options and need help deciding on the best course of action, the following considerations will help provide more clarity during the decision-making process.
1. Validate the Need for New Technology
Many organizations have their eye on new technology before identifying any legitimate business need. Sometimes this “cart before the horse” approach is due to rigid business processes, lack of technical knowledge, or pure product hype. Decision-makers are very often awed by product suite success stories, dynamite product demonstrations, and industry analysts’ evaluation of technology—even when they haven’t formally identified a need for the technology.
To avoid these pitfalls, treasury and IT teams need to first validate the need for upgraded connectivity and payment protocols, prior to even beginning to evaluate which solution makes the most sense.
Last, but not least, tech leaders need to provide an estimated return on investment (ROI) for any new solution, along with a description of how ROI will be measured. It is surprising how many programs are initiated without considering ROI or added business value upfront. Many of these projects consume a lot of budget and time before leaders realize that either the solution will not add value or there is not a legitimate business need.
2. Identify Core Connectivity & Payment Requirements
In large organizations, pinpointing core connectivity requirements is often easier said than done. Still, it is a critically important step to take before deciding to implement a new solution. A core business requirement is one that must be supported by the solution to continue functioning as intended. For multinational organizations, core connectivity requirements may involve compatibility with numerous format types (EDI, BAI, SWIFT MT, ISO 20022, etc.) as well as numerous bank channels (SWIFT, H2H, EBICS, etc.) and back-office integrations (APIs and plugins for ERPs or TMSs).
Although determining treasury’s exact connectivity requirements may be difficult, it is extremely important to identify these core functional requirements first—not technology or design requirements. This is the only way to ensure unnecessary or redundant functionality is not purchased erroneously, and also ensures that critical requirements are never accidentally overlooked and unaddressed through whatever solution is ultimately chosen.
3. Consider Your Technology Architecture Requirements
Going a step further than the above point, it’s safe to assume that organizations are already using technology to enable other business processes. To reduce the cost and liability of this technology, your organization has also likely adopted standards related to how internal solutions are implemented and maintained.
As such, it is extremely important to identify any architectural requirements or standards that a solution must adhere to before determining if a 3rd party solution or an internal solution is the best choice. Some factors that may restrict the solution choice are as follows:
4. Examine & Evaluate Existing Solutions FIRST
At this point, a business need has been pinpointed, ROI has been estimated, and both core business and architectural restrictions have been identified. Leaders should now take a good look at existing systems.
It is not uncommon that different departments or entities of a large, global organization are not aware of what systems exist in other areas of the company. As a result, businesses will often implement multiple versions or forms of the same technology, only to discover that another system within the organization could have supported treasury’s new requirements with little to no modification. Thus, before deciding on the “best-fit” solutions approach, you should determine if any existing system(s) within the organization can be easily scaled or extended to meet your business need.
5. Compare In-House Expertise & Bandwidth Relative to Current AND Future Capabilities Required
One major factor that can significantly reduce the ROI of a custom-built solution (and in many cases, ultimately causes the project to fail) is the lack of available personnel with proper skill sets. In reality, the process of designing and deploying custom connectivity solutions that are both scalable and extensible is a massive undertaking for both treasury and IT. Unless one of your business areas is product development or you have an abundance of available IT support, there is an extremely high probability that your operations and maintenance technology resources will not be able to build, sustain, and support an internal solution, especially as new needs and requirements arise over time.
It is never profitable to let personnel gain these skills and experience by developing business-essential systems. Yet, more often than not, decision-makers see the short-term cost differences between an internally-built vs 3rd party solution and decide to try and build their own in order to save money. However, unless you’re supremely confident in the skillsets and bandwidth of both your treasury and IT teams, this option is not recommended.
Why TIS is the Ideal Provider for Global Payments, Liquidity Management, & Bank Connectivity
Ultimately, any organization evaluating whether to build or buy its next solution will have to closely analyze its own operations in order to make the best decision.
In cases where organizations require support for a complex array of payments and bank connectivity protocols and are open to considering a 3rd party vendor, they should closely evaluate the capabilities provided by TIS.
The cloud-based, fully-supported platform provided by TIS offers a global, multi-channel, and multi-bank connectivity ecosystem that streamlines and automates the processing of a company’s payments across all their global entities and systems. By sitting above an enterprise’s technology stack and connecting with all their back-office, banking, and 3rd party solutions, TIS effectively breaks down department and geographic silos to allow 360-degree visibility and control. To date, the ~200 organizations that have integrated TIS with their global ERPs, TMSs, and banking landscape have achieved near-100% real-time transparency into their payments and liquidity. This has benefitted a broad variety of internal stakeholders and has also enabled them to access information through their platform of choice since the data that passes through TIS is always delivered back to the originating systems.
Because of the deep connections that TIS maintains with internal systems such as ERPs or TMSs, external banks, and 3rd party vendors, the process of managing payments is simplified for every internal stakeholder. C-suite executives, treasury, accounting, AP, legal, HR, and other key personnel can access whatever financial data they need, exactly when they need it. And by automating this flow of information for both inbound and outbound payments, TIS provides the control and flexibility that enterprises need to function at their highest level.
Finally, with the global payments data we have amassed and the decades of experience our team has in orchestrating enterprise payments, we are uniquely equipped to help enterprises accurately benchmark their payments performance and provide tailored advice on how to optimize, grow, and mature. Ultimately, this rich data and deep experience are what enable us to continually provide industry-leading payment solutions and support to our enterprise customers.
In the digital world of enterprise payments, TIS is here to help you reimagine and simplify.
For more information about how TIS can help you, visit our website or browse our latest resources!
13-06-2022 | Eurofinance | treasuryXL | LinkedIn
Featuring keynote speakers, Guy Verhofstadt and Göran Carstedt…
The 31st annual EuroFinance International Treasury Management returns in-person this September 21st-23rd in Vienna. With treasury changing like never before, join more than 2000 attendees, including 150 world-class speakers for transformative insights and the year’s best networking.
Learn from the experiences of more than 150 best-in-class treasurers including:
– Abraham Geldenhuys, VP and group treasurer, Kongsberg Automotive
– Yang Xu, SVP, corporate development and global treasurer, Kraft Heinz
– Alex Ashby, Head of treasury – Markets, Tesco
– Debbie Kaya, Senior director of treasury, Cisco Systems, Inc.
– Daniel Melski, VP finance and treasurer, Church & Dwight Co., Inc.
– Angel Cheung, Assistant treasurer, John Lewis Partnership
For more information and to register, visit: https://www.eurofinance.com/international
TreasuryXL contacts can claim a 10% discount with code: MKTG/TXL10 on top of the early-bird price which expires on July 29th – a combined saving of over €2000. Register here today.
We hope to welcome you in Vienna.
The EuroFinance Team
EuroFinance, part of The Economist Group, is a leading global provider of treasury, cash management and risk events, research and training. With over 30 years of experience, our mission is to bring together the brightest minds and most influential voices in treasury. Through in-depth research with 1,000 corporate treasury professionals every year, we have a unique insight into the trends and developments within the profession and an unrivalled global viewpoint.
Marianne Ford
Senior Marketing Manager
EuroFinance
Economist Impact
[email protected]
08-06-2022 | treasuryXL | Cashforce | LinkedIn |
From forecasts to forex. The member said this is only possible because Cashforce can forecast at a high level of granularity. The AT said she was “really lucky” that the tools work together so well.
A closed loop. Nicolas Christiaen, Cashforce’s CEO, said that, before this project, the member’s process was “very disconnected,” but all it took was connecting the dots.
A step further. With the proposed system that the member has designed with Citi, the company could include its hedging policies as a rules-based program in CitiFX Pulse that can read this forecast.
Constant change. Automation is “an awful lot to bite off,” the member said, and recommends starting slow on this kind of process:
Article originally published by Neugroup here.
07-06-2022 | treasuryXL | Nomentia | LinkedIn |
A company’s worst nightmare is to run out of cash or completely miscalculate future cash in- and outflows. To prevent such doom scenarios from happening, companies use cash flow forecasting tools to help them understand current or future cash positions. Having accurate cash forecasting analyses in place is important because they are fundamental for your company’s growth. You can base your strategic investments and financial decisions on them, and they help you decide on how you shape the future of your company.
As with most things, cash flow forecasting is easier said than done. Developing accurate forecasts can be a challenging job. Especially when your business is increasing in size, you need to consider many aspects. Fortunately, there are several great cash flow forecasting tools to help you overcome the challenges you have, to make forecasting easier and more accurate.
Simply put, cash flow forecasting is the practice of understanding your movement of money that goes in and out of the business, now, in the short-term, or in the long-term. A higher cash inflow than outflow results in a positive cash flow position. And when your cash outflow is bigger than your cash inflow, it results in a negative cash flow position.
Many professionals understand that analyzing cashflows is important yet fail to build reliable processes to do so accurately. Robust cash forecasting will help you understand what your cash position is now, and in the future, simply by analyzing cash in- and outflows.
We will not go too much into detail to discuss the challenges of cash forecasting, which we already did in this article. But commonly, treasury and finance teams struggle with two main reoccurring challenges:
One of the key challenges in cash forecasting remains the amount of manual labor that goes into it. Especially when your organization is larger, and you need to combine financial data from different banks, subsidiaries, and ERP systems. Depending on how frequently your team runs the forecasting process, it can become very time-consuming.
According to different sources, it is recommended that treasury and finance teams run forecasts on a weekly basis to increase financial control. Imagine all the hours that go into this process by doing so manually: collecting data from multiple data sources and recording everything into your spreadsheets. And that doesn’t even include running the analyses to base your strategic decisions on. To top it off, the spreadsheets also contain many errors, which makes them less reliable.
To add to that, by collecting your forecasting data periodically you never have real-time insight into your cash position because your cash predictions may have changed already the day after you made your analysis.
Having flexible cash flow and liquidity reporting, and collecting data on cash flows was found most challenging or very challenging for around 70% of decision-makers according to our study with Forrester.
As mentioned earlier, it is a very inconvenient aspect to create liquidity and forecast reports when the data you need is scattered across multiple systems. In global companies, you would need to access several bank accounts to check balances. Or you are working with different subsidiaries, where you need to rely on the timeliness and accuracy of your colleague’s input. Whatever systems you’re using, having a centralized place that automatically pulls all the data from them into one place in real-time can benefit you tremendously.
Effective cash flow forecasting tools are there to help you overcome typical forecasting challenges. They help you manage and track all your business cash flows now and in the future. Allowing you to make better strategic and investment decisions for your business.
There are various solutions available on the market, and they all work differently. Ideally, a tool should be able to help you with your cash forecasting in various ways.
A great tool gives you an instant overview of your cash position, inflows, and outflows at any time you need it. The more up-to-date your data is, the better you can justify your decisions.
Especially for larger enterprises with multiple banks, ERPs, and other source systems, a tool needs to be able to flawlessly connect to all of them. That’s the only way for you to combine all the financial data required to make accurate cash forecasts.
Both the gathering of real-time information and connection to all source systems should be automated by the tool or software. That way you can automatically gain real-time insight into your cash position without manual labour.
Following up on the previous point, once your tool has automatically-collected data, it should be able to visualize it in a customized way that suits your needs. Whether it is certain types of reports, graphs, or other dashboards.
Better and faster analyses of your cash position and forecast without creating reports manually will help you save the time that you can use for making strategic decisions.
Market research has shown that in the U.S. in 2018 alone, around 63% of companies used spreadsheets for budgeting and reporting purposes. Even though this number was declining, spreadsheets are still considered the most basic go-to tool for cash flow forecasting.
The two main (free) providers for cash forecasting tools on a basic level (they don’t need explanation):
Of course, you can make your spreadsheets as advanced as you want. But the fact is that most smaller organizations traditionally use spreadsheets to do their cash flow forecasting. Their set-ups are less sophisticated and with fewer data sources. As a result, it’s easier to pull the data you need.
The advantage of spreadsheets is that they are very cheap and effective. Yet, once your organization grows bigger and you start using several banks, and other source systems like ERPs, they become unmanageable and start taking a lot of your team’s resources.
There are several intermediate cash forecasting tools that are increasingly helpful for smaller and medium-sized companies compared to the basic tools. Sometimes they can replace spreadsheets completely, but most often they complement them.
Microsoft’s Power BI is a tool that can collect data from different sources and allows you to visualize them through dashboards. Though it’s a handy tool, it requires quite a bit of training and getting used to. Connecting Power BI to your systems, importing data, and building the right reports can still require a lot of manual labor.
Power BI’s list of systems you can connect to is limited. Especially bank and ERP connections are lacking which are usually required for bigger companies.
Power BI dashboard example
If you have an accounting system, a CRM, and some data warehousing system, chances are that Causal can help you out collecting that data in one place. Their data visualization tool will help you better understand the combined data from your connected places.
Just like Power BI, Causal is unable to connect to financial institutions, like banks, that are often required to get a better understanding of your cash position.
Sheetgo is a handy tool when you want to combine the data from different spreadsheets. The more spreadsheets with financial data you have the more challenging it is to combine them and build accurate cash flow forecasts.
Sheetgo does not take away the manual work that includes pulling data from source systems. It is more a tool made to integrate with Google Sheets or Microsoft Excel.
Sheetgo’s cash flow template
If you’re looking for a cash flow forecasting tool that can connect multiple source systems, banks, and ERPs – then Nomentia Liquidity is a great option. Nomentia Liquidity gives you visibility over your past, present, and future cash positions.
Nomentia automatically pulls all data from different source systems and visualizes them in a customized format for each client. The implementation is also done together with a dedicated customer specialist, so you don’t have to worry about any manual labor or integration problems.
Nomentia’s liquidity dashboard
If you’re looking for more complete cash forecasting services, then you need to consider the top treasury and cash management vendors that are well known. Most of these vendors offer Software as a Service (SaaS) solutions which take away the work of managing the solution.
Nomentia’s cash forecasting SaaS solution allows you to do forecasts as detailed as you require. You can run real-time forecasts continuously based on a collection of all scattered systems that hold your financial data.
The platform works very intuitively, and you can even run simulations for possible scenarios. The data visualization can be customized by yourself or by specialists from Nomentia. In contrast with other vendors, you can only opt for the cash forecasting module without committing to any other modules offered by Nomentia.
Kyriba has a tool for cash forecasts that combines multiple data sources. They can provide you with daily, weekly, monthly, or yearly cash forecasts.
In their SaaS, Kyriba has a worksheet that can help you automate manual work and connect different systems to each other for better-centralized cash forecasting analyses.
The cash forecasting tool by Gtreasury allows you to combine data into a single worksheet and run different analyses within it. You can run forecasts daily, weekly, monthly, quarterly, or annually.
A recent feature GTreasury introduced is the trademarked SmartPredictions, which can predict future liquidity and changing conditions with the help of data imports and artificial intelligence.
Coupa’s treasury solution includes a cash forecasting module that can build scenarios, and do analyses to measure your short, mid, and long-term business liquidity.
The financial data is captured in a reporting functionality that treasury teams can easily analyze and share within the organization. Coupa offers both standard and customized reports.
Serrala offers cash forecasting as part of its bigger cash management solution. The module can be set up for cash flow-based planning categories, scenarios, and simulations.
The solution helps you automate your processes by configuring the settings yourself, and it gives you insight into your cash position through the consolidation of various data sources.
A cash flow forecasting tool can be beneficial for you to tackle the manual labor and time consumed due to a lack of centralization. If your set-up is not that advanced yet, you can rely on solutions like spreadsheets or intermediate tools like Power BI, Causal, Sheetgo, or Nomentia Liquidity.
For bigger companies with several source systems, we recommend looking into advanced cash forecasting tools that will significantly decrease your costs. Even if the initial investment of buying such a solution may appear slightly higher.
01-06-2022 | treasuryXL | CashAnalytics | LinkedIn |
Recently, treasuryXL partnered with CashAnalytics on a LIVE discussion session about how much time, effort, and money can be saved by adopting a data-driven approach to cash forecasting.
During this session, Conor Deegan CEO of CashAnalytics was joined by Ron Wessels, owner of Term Finance and Interim Head of Tax & Treasury at Systal Technology Solutions, and Pieter de Kiewit, Owner of Treasurer Search. They have presented battle-tested methods for increasing the reliability of your data, breaking free from tedious forecasting processes, and freeing up more of your time for analysis.
Click on the image above to view the recording and learn how cash flow automation
31-05-2022 | treasuryXL | Gtreasury | LinkedIn |
Source: Gtreasury
Original Broadcast: April 19, 2022
Gain on-demand access and learn how to take the first steps toward creating a hedge program. HedgeTrackers, Juan Enrique Arreola, and GTreasury’s Evan Mahoney outline:
Featured Speakers:
Juan Enrique Arreola, CPA
Client Services Manager
HedgeTrackers
Evan Mahoney
Product Owner
GTreasury
24-05-2022 | treasuryXL | Refinitiv | LinkedIn |
Fixed income volatility looks like it will be around for a while, due to whipsaw-like changes in the overall economic environment. In such an environment, firms need to have the right evaluated pricing to ensure they are pricing their portfolios at fair value levels and that they are complying with regulations.
17-05-2022 | treasuryXL | TIS | LinkedIn |
Fraud as a threat: Evaluate your risk!
Record high of fraud threat level: 87% of professional treasurers from companies and banks worldwide have perceived an increase in fraud threat in comparison to the year before. * Attacks on companies have intensified significantly, threatening all processes of financial transactions and payment relevant courses.
Additionally, due to the rapid change to remote work since the start of the pandemic, security strategies have undergone the greatest stress test. New and secure means are available and necessary to protect your company against rapidly evolving fraud schemes.
* Strategic Treasurer – 2021 Treasury Fraud & Controls Survey Report
11-05-2022 | treasuryXL | Cashforce | LinkedIn |
Despite the disruption to customer behaviour brought by the Covid-19 crisis, Pearson developed a consolidated forecasting process that has enabled it to speed up invoicing, accelerate £60m in cash flow and meet its 2020 targets.
Cash flow forecasting has long been recognised as a major challenge for corporations – and learning company Pearson, which has over 20,000 employees and reported sales of £3.4 billion in 2020, is no exception. “One of the challenges with forecasting is to understand what your assumptions are when producing the forecast,” explains Group Treasurer James Kelly. “When you’ve got lots of people producing forecasts independently, and then consolidating them, you need to have a consistent approach.”
Getting people to produce a forecast on time can be difficult, while treasury teams often spend precious time pursuing clerical accuracy. And as Kelly adds, “it is important to have enough detail in your actuals to really understand whether the hypotheses that were ventured in your forecast have actually come to pass.”
The latter is particularly important in times of uncertainty – and few things are as unpredictable as the onset of the Covid-19 pandemic. For many organisations, the crisis meant that cash flow forecasting became significantly more challenging overnight, not least because disrupted customer behaviour meant that forecasts based on historical sales patterns could no longer be relied upon.
For Pearson, with the company’s professional test centres forced to close due to lockdowns, a major challenge came in the form of refunds that had to be issued to customers for tests that had been booked in advance – a situation that was complicated by the differing ways that customers could respond. Some rebooked straight away; some requested an immediate refund, and others waited for a couple of weeks before requesting a refund. And when requesting a refund, customers could either apply to Pearson directly, or request a refund via their credit card companies. All these different scenarios impacted the company’s short-term modelling.
While the challenges were considerable, Pearson’s treasury had already been on a journey to more effective forecasting before the pandemic began – indeed, the automation of cash forecasting formed part of a treasury and cash management optimisation project that won a EuroFinance Treasury Excellence Award in 2019. The company subsequently adopted Cashforce’s AI-powered forecasting system, and continued to work on improving its processes. However, when the pandemic started it was clear that a more comprehensive approach was needed.
“What was interesting about Covid was that some of the basic models that we built around predictable cash flows broke,” Kelly comments. “We were able to keep using some of our models for things like payroll – but on the receipt side, a lot of things that had previously been predictable now became unpredictable.” What this meant was that the forecasting ability of the system almost became redundant – “and the benefits of the solution became more about hypothesis testing, and as a consolidation engine that allows you to build different scenarios.”
With the onset of the pandemic, each business produced a high, medium and low sales forecast, which the treasury team used to build its own set of forecasts. While this exercise was initially carried out using Excel, the treasury’s Cashforce-based 12-week forecast demonstrated good levels of accuracy, as well as integrating with key group systems. As such, the system was selected as the basis for the new approach to producing short, medium and long-term forecasts in 16 categories, later expanded to include 120 subcategories.
Pearson’s functional currency is GBP, so with considerable variability in the company’s US profits another question was how to use the forecasting information to hedge currency risk. Again, this drew upon the low, medium and high scenarios: forward contracts were used to hedge committed or highly probable foreign currency flows for the low scenario, with collars and options used to provide protection for the medium and high scenarios.
Pearson has seen numerous benefits as a result of its enhanced forecasting process. Preparing forecasts centrally has freed up significant time for the operating companies, as well as enabling forecasts to be updated daily, instead of weekly or monthly. And Kelly notes that forecasts are now significantly more accurate than they were in 2019, despite uncertainty relating to the pandemic.
Further, Pearson has been able to use insights from the forecasting process to drive better performance in its working capital metrics – in particular, lower DSO, lower variability in DSO, and faster invoicing speed. These initiatives accelerated over £60m of cash flow in 2020, enabling Pearson to achieve its objective of delivering operating cash flow of over £300m, despite the pandemic.
Above all, the crisis has acted as a catalyst for Pearson to rethink the nature and purpose of forecasting. As Kelly concludes: “Whether the forecast is right or wrong becomes less important than understanding why it’s right or wrong. So the game we were playing wasn’t to get the forecast right on any particular day, but to have a good understanding of the business over time – which then enables you to get it right.”
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