Cash & Liquidity ManagementCash ManagementCash Forecasting‘Never Mind Forecasting Future Cash Flows … What About Today ?’

'Never Mind Forecasting Future Cash Flows ... What About Today ?'

According to the JPMF International Cash Management Survey, many treasurers are investing cash for short time periods, often overnight or less than one week. This may be because cyclical companies often generate volatile cash flows, making treasurers more comfortable to remain liquid so that they can react to unforeseen outflows. It may also be, however, because of inadequate cash flow forecasting and positioning, which leaves treasurers in the dark as to their true cash position and lacking the confidence to invest or borrow for longer time periods.

Average cash balances of short-term investment portfolio (US$) equivalent

Source: JPMorgan Fleming International Cash Management Survey 2003 in conjunction with the ACT

Cash positioning

Whatever kind of business and however volatile the cash flows, treasurers can maximise the value of their cash holdings by more accurately identifying and predicting positions through the day to enhance investment or borrowing opportunities and therefore overall returns.

However, forecasting corporate cash flows even for ‘today’ can be like trying to predict the weather. Reliable same day cash flow data is critical in order to avoid unnecessary overdraft charges or loss of investment opportunity. However, it is easier said than done with many complicating factors affecting the accuracy and timeliness of information. These include

  • The ability to manage and predict incoming credits particularly in a multiple bank scenario. Most banks offer proprietary balance and transaction reporting for their own bank accounts where payment instructions are electronically recorded for cash position reporting. Additionally banks can usually handle ‘book transfers’ automatically where both the debit and credit party hold accounts with that bank. The more problematic side of cash positioning arises when incoming credits are expected from third party bank accounts. In today’s markets there is often no guarantee when these credits will be processed and posted to the receiving bank leading to issues for intra-day cash forecasting. The timing can also affect end-of-day positions and reconciliations that are not always fully resolvable through back-valuation services.
  • Non-electronic items (e.g. cheques) that require ancillary reporting services to ensure an accurate understanding of timings around arrival, processing or ‘float’ and availability on value day.
  • Non ‘straight-through’ instructions that necessitate repair and manual intervention can also create deviations to expected cash flow if not resolved expediently.
  • Unexpected payments can cause standing credit lines to be exceeded and outgoing payments to be held up
  • Pan-regional and global cash flow management can lead to logistical issues where time zones, reporting systems and market conventions complicate affairs

What treasurers need

Sophisticated systems are needed to track many of these complex factors and turn the data into useful, real time information. For larger companies that typically have banking arrangements with more than one provider, multi-bank capabilities are also required so that all account details are consolidated through an automated central hub.

Unfortunately, market progress towards fully functional multi-bank systems has been slow to date as they often require complex tri-party agreements and some banks have not been keen to provide information on their clients and products freely to other banks or competitors.

Undoubtedly electronic information is now more readily available than ever before to make forecasting easier. It just needs someone to bring it all together and if the banks don’t do this there is a growing body of opinion that the big software companies will start to fill this market space – The banks have been warned !

One recent development that will enhance bank cash flow forecasting services is the growing trend towards “liquidity overlay services” bringing systems and processes together for the benefit of treasurers. Furthermore some banks have been able to rapidly extend their reach through a network approach and the use of partner banks. The industry is moving towards the provision of single banking interfaces for clients and partner bank alliances allow global banks to select smaller regional banks as partners to cover specialised markets, such as Eastern Europe or Latin America. This gives the larger banks access to local expertise and greater global scope, while treasurers get a single, common platform in terms of client servicing and reporting throughout their global operations making it easier to track cash flows.

What treasurers can do

While banks and technology companies are working hard to improve cash forecasting tools there are a number of areas where treasurers can help improve same day cash flow forecasting.

Revisiting the ‘complicating factors’ list above, the following should be considered

  • Banks will sometimes offer services to ‘fast-track’ payment release so that in-coming credits are not delayed until near clearing closing time. This may depend on the relationship value that Corporates hold or the efficiency of the bank’s processing systems. Either way there is the potential to attain a more timely same day service. Many banks also provide an ‘advice-to-receive’ handling service that can be used to ensure incoming credits are positioned in time for critical cut-off points in the day.
  • Limiting the volume of non-electronic products and ensuring they are low value items wherever possible will improve cash flow forecasting accuracy
  • Controlled payment and account reconciliation functions as well as service level agreements with the banks/information providers should help reduce error incidences and ensure timely escalation of errors for resolution.
  • While banks can often make credit decisions quickly it is prudent to provide as much advanced warning as possible if extra credit is required to avoid payments being unnecessarily held up
  • Understanding different market and banking conventions for issues such as value dating and cut-off times is important when entering new markets or launching new services e.g. a cross-border liquidity concentration structure.

Outsourcing

Outsourcing all or part of the treasury function is another way to enhance cash positioning in a cost effective manner. Banks with agency treasury capabilities have the technology and knowledge to reduce treasury overheads for companies, saving technology investment costs, reducing risks and errors and adding value through improved access to electronic information and money markets.

But, the whole treasury function need not be outsourced for benefits to be felt – many companies opt just to outsource the cash flow forecasting and liquidity management function to banks. Automated cash concentration and investment sweeping solutions are becoming increasingly sophisticated and popular choices for treasurers. In fact, global banks are now offering the ability to automatically concentrate all US Dollar or Euro liquidity in to a single global position with automated two-way investment connectivity.

Conclusions

Improved cash flow management clearly gives treasurers more alternatives to add value to the cash management process. In particular, more confidence around the stability and duration of cash opens up opportunities to invest in an array of money market instruments and commit beyond overnight to tap in to higher yielding products.

In fact the uncertainty that currently persists around accurate same day and short-term cash forecasting is one of the reasons why one particular investment product, money market funds, have grown in popularity as their flexibility gives treasurers daily access to their cash if mistakes are made. As cash flow management becomes an increasingly reliable process, new investment solutions should evolve in the market place that will be less reliant on same day access to help drive up yields.

Cash flow forecasting can never be 100 per cent accurate as only a soothsayer could foresee the many events that occur daily in the business world. However, opportunities now exist for treasurers to predict and plan for ‘known’ future cash flows, through enhanced treasury process as well as greater use of market leading bank services and technology. These capabilities mean that treasurers should have greater power than ever at their fingertips to not only invest more of their surplus cash for longer periods but also have access to a broader array of investment products, generating enhanced opportunities for higher returns.

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