Many companies do not have a decentralized approach but rather a centralized approach when making their forecasts. The centralized approach is based on central estimates of cash flow and flow variations. This forecasting method is a process where the operating units and staff provide the data to a centralized forecasting system. Very often, the decentralized approach is developed under the pressure of cash constraints, when the cash generation has not been sufficient for a certain time or sometimes when the company is private. Private companies often focus much more on treasury than public companies. Many examples show that by withdrawing the surplus cash from operations, Cash discipline has been strengthened beyond mere cash flow. Some entrepreneurs have managed to build their business in this way because they have “forced” them to survive and grow with very little financial resources. In general, the more stringent a discipline and rules a company has in terms of its cash flow forecast, the more accurate the forecasts will be. Note: the quality of the cash flow forecast depends on the data and not on the computer system you use. During the credit crisis, many groups realized that the risk associated with access to liquidity was probably the biggest risk for a company; this has encouraged the development and execution of better methods. Some entrepreneurs have managed to build their business in this way because they have “forced” them to survive and grow with very little financial resources. In general, the more stringent a discipline and rules a company has in terms of its cash flow forecast, the more accurate the forecasts will be. Note: the quality of the cash flow forecast depends on the data and not on the computer system you use. During the credit crisis, many groups realized that the risk associated with access to liquidity was probably the biggest risk for a company; this has encouraged the development and execution of better methods. Some entrepreneurs have managed to build their business in this way because they have “forced” them to survive and grow with very little financial resources. In general, the more stringent a discipline and rules a company has in terms of its cash flow forecast, the more accurate the forecasts will be. Note: the quality of the cash flow forecast depends on the data and not on the computer system you use. During the credit crisis, many groups realized that the risk associated with access to liquidity was probably the biggest risk for a company; this has encouraged the development and execution of better methods. In general, the more stringent a discipline and rules a company has in terms of its cash flow forecast, the more accurate the forecasts will be. Note: the quality of the cash flow forecast depends on the data and not on the computer system you use. During the credit crisis, many groups realized that the risk associated with access to liquidity was probably the biggest risk for a company; this has encouraged the development and execution of better methods. In general, the more stringent a discipline and rules a company has in terms of its cash flow forecast, the more accurate the forecasts will be. Note: the quality of the cash flow forecast depends on the data and not on the computer system you use. During the credit crisis, many groups realized that the risk associated with access to liquidity was probably the biggest risk for a company; this has encouraged the development and execution of better methods. During the credit crisis, many groups realized that the risk associated with access to liquidity was probably the biggest risk for a company; this has encouraged the development and execution of better methods. During the credit crisis, many groups realized that the risk associated with access to liquidity was probably the biggest risk for a company; this has encouraged the development and execution of better methods.
Depending on the periods, companies may run out of cash or experience a cash surplus. Cash flow forecasts are tools for managing cash, investments and borrowings. Poor cash flow forecasts can result in inaccurate hedge volumes and require more working capital than necessary.
This is why the decentralized approach has many advantages:
This flow forecasting method is long enough to implement. Very often, the external pressure imposed by investors and banks during periods of cash pressure pushes companies to adopt this method. The most successful companies are also very often those who have experienced such periods, when the banks then asked for cash flow forecasts so detailed that only the decentralized method worked to generate such forecasts. We observed that these high-performance companies had chosen to keep the decentralized method, despite their return to a stable cash position. These companies have chosen to keep and develop this forecasting technique for many reasons.
- The cash flow forecast improves liquidity management. If companies have the opportunity to cash pool, they can manage cash shortfalls of some of their entities in the short term or invest these funds elsewhere if they are not needed within the group.
- The medium and long-term forecast allows the treasurer to find ways to optimize the three variables: liquidity, return and security for investments.
- The cash flow forecast improves a company’s forecast of its ability to generate future cash. If the treasurer is able to predict future cash inflows and outflows, this allows him to be proactive.
- Companies may have to provide forecasts to their creditors in order to comply with the financial contract that binds them.
- If the cash flows are known in advance, the construction of the budget is facilitated. Companies can optimize their investment activities during periods when funds are more accessible and cheaper.
- The cash flow forecast can also be a way to evaluate working capital initiatives. For example, if customers tend to delay payments for goods sold, management may decide to improve the payment process.
- Cash flow forecasts make smart decisions about the timing of dividend payments.
- A good forecast discipline better billing and collection.
- Quality cash flow forecasts facilitate the streamlining of legal structures to improve cash management and control.
- It is easier to optimize taxes by knowing the flows in advance.
- Working capital can be kept at low levels and reduce the need for lines of credit.
- The sharpness of the currency hedge is improved.
- Calculations of optimal cash reserves are facilitated.
- Maintaining cash flow forecasts and real cash flows makes it possible to build a database that is very useful for trend analysis.
- Long-term forecasts allow pro-active management and adjustment to changing conditions. This is particularly interesting for highly volatile industries as costs and revenues can change quickly.
Predict data sources
- accounts payable
- accounts receivable
- control systems
- project systems (eg client project budgets and investment projects)
- taxes
- wages and bonuses
- budgets (when current data is not available)
- financial flows (loans, deposits, foreign exchange, etc.)
- Bank charges
- rents
- investments
- Mergers and Acquisitions
- other (dividends, management fees, etc.)
The challenges of the decentralized method of cash forecasting
Many groups have tried to predict their cash flow. Many of them gave up because implementing the decentralized method can become a cumbersome process. In addition, maintenance consumes both time and resources.
- Cash is seen by operating companies as a service function: this requires a lot of management attention in order to be able to act regularly as an information requester.
- Operating companies must make high-level expertise available for accurate forecasting. There is sometimes a lack of motivation to achieve cash flow forecasts that have little variation.
- Some companies are already generating sufficiently accurate cash forecasts using the centralized method or historical data, which is relatively simple and requires few resources.
- The support of the system must be strong and avoid the risk of misunderstandings that could create ambiguity around what the forecast figures reveal.
roles
The role of treasurers
- It combines weekly cash flows submitted by operating companies into consolidated reports
- It manages cash pooling, invests surplus cash and ensures that funds are available in a timely manner.
- It provides feedback and ideas to operating companies
- It provides insightful reports to management
- It keeps operating companies up to date on forecasting techniques and training
- It gives or restricts access to the cash forecasting system
The role of operating companies
- Operating companies own the forecasts
- They must ensure the attention and involvement of management in the process
- They enter the cash flow forecasts and real estate flows and adhere to the company’s policy.
- They perform the analysis of variance and present it weekly to the cash breakdown.
- They communicate with the appropriate departments to obtain the key data of the company.
Key success factors
The key success factors are discipline, high visibility across the group, and thorough and regular gap analysis, with tests and detailed analysis. Forecasting must become a habit, a component of the company’s DNA, and the numbers must be closely monitored by management.
- The demand for cash flow forecasts has its origins in the executive management and they must be convinced of the validity of setting up, developing and maintaining a cash flow forecast over the long term.
- Make cash flow forecasting an integral part of company policy and encourage management of operating companies to make high quality cash flow forecasts.
- Put in place appropriate tools for data capture, reporting and monitoring
- Introduce key performance indicators within the group based on cash flow alongside those based on earnings.
- Make the position of treasurer a transparent position: this position must be a service center and a corporate personnel unit that establishes a policy and rules to be respected
- Follow the gaps and be attentive enough if they are too wide. Try to optimize the gap at the end of the month only and give the correct size to the acceptance levels of the gap. Do not repeat the operation too often.
- Involve farm companies and instill the importance of forecasting.
- Schedule appointments with treasury staff to retain responsibility and authority to execute a methodology and systems.
- Conduct regular training and staff at the business unit level to respond to job rotation and new arrivals.
- Incorporate changes in business trends and circumstances into the forecast numbers.
- Standardize the consolidation and reporting of cash flows into one system.
- Institutionalize the explanations with triggers on the expected and actual gap.
- Link the cash flow forecast to the group’s forecasts and budget construction;
- Mandate the cash flow forecast by each operating company
- Involve the executive management and management of the operating companies (ownership, closer to the company, importance, awareness of the issues)
tips
- Include capital outflows in red to help identify them. This is particularly important for reporting to executive management.
- Use a disciplined approach with the predictability built into the routine.
- Ensure good visibility of forecasts within the group. Acting on deviations by piercing and understanding their causes to learn and improve forecasting techniques.
- Base the premiums on accuracy.
- Companies focus more on cash flow in times of crisis: take advantage of it, exploit this energy
- The right amount is more important than the right timing. Sometimes irregular payments and debt collection such as tax refunds are not included in cash forecasts by operating companies as timing is uncertain
- Include the forecast process in the Sarbanes-Oxley documentation, make this mandatory
- Make the difference between cash accounting and bank cash: this comes from the difference between the booking date and the value date. It is not possible to change the value date in the accounting system, but it is necessary to adjust and train the cash flow of the group regularly.
- Follow the trend in the deviation results by smoothing the deviation, using a three-month average. The importance of the differences will be diminished.
- It can be difficult to automate forecasts of interest amounts within the company and external accounts.
- Interest rates in business-to-business accounts should be documented in a manner similar to the transfer price when complying with international tax rules.
- A conservative approach is not desired when it comes to cash flow forecasting. Payments should not be overestimated and revenues underestimated as is often the case in areas such as sales forecasts.
- Contracted costs, which are not included in the accounts payable (such as bank syndication fees), may be forgotten in the forecasts and be indicated in the first position on the reminder receipt.
Frequent errors
- Cash flow forecasts are not made at the level of the operating companies.
- Management does not pay special attention to the cash flow forecast
- Operating companies pay little attention to planned / actual gap analyzes
- Prediction methods are bad and have heterogeneous levels of accuracy
- The cash flow forecast is done outside the company; information is not always communicated in a timely and accurate manner
- Key business flows are not reported (pensions and insurance or disruptive events)
- Some events are difficult to measure (consequences of weather conditions, influences of competitors)
- Many PGIs can not manipulate negative interests, which will no doubt become a reality.
To conclude, divide the cash flows of each business unit into two accounts: one for incoming payments and the other for outgoing payments. The incoming payments account is controlled by the central treasury and the funds can not be used by the units. The central treasury fills the accounts for outgoing payments in accordance with cash flow forecasts. Based on the accuracy of the forecasting history, the central treasury determines how future forecasts will respond to requests for outgoing payments. These tips may seem quite arid, but following them will greatly improve the accuracy of your cash flow forecast.
