Cash & Liquidity ManagementCash ManagementCash ForecastingHow Technology is Making the Treasurer King of the Counting house

How Technology is Making the Treasurer King of the Counting house

Remember the old nursery rhyme about the King in his counting house counting out his money? If the King is likened to a treasurer, then this particular one is rightly prudent. The treasurer needs to ensure that he knows where his cash is and how much of it there is at any given time. Of course, in the real world, counting money is not a simple matter. Planning is imperative and in order to forecast appropriately, treasurers need to maintain a bird’s eye view of overall cash flows, as well as a worm’s eye view of transaction detail, preferably at the touch of a button. To achieve this, it is crucial that the right processes and systems are in place to provide an instant snapshot across the corporation wherever and whenever it is required.

Maintaining such a comprehensive overview is not a new challenge for global corporates, but timely delivery of accurate, detailed information is. Cash flow forecasting has always been the basis of sound financial management, but burdensome data collection and aggregation tasks mean the benefits are rarely fully realised due to the effort involved in securing them. However, a combination of regulatory and market factors mean that treasurers are trying to overturn the status quo. Recent feedback from clients suggest that the following current priorities tend toward a renewed focus on cash flow forecasting:

  • Sarbanes-Oxley – Section 404 of the Sarbanes Oxley Act requires corporates to report on the strengths and weaknesses of their internal financial controls. Firms that report cash flows on a monthly basis and take a week to consolidate those reports because of lack of systems integration will not only have an inaccurate view of local funding requirements, they may be regarded by their auditors and the SEC as falling below corporate governance standards demanded by Sarbanes-Oxley.
  • Hedge accounting regulations – FAS 133 and IAS 39 require that foreign exchange hedges taken out by treasurers are seen to closely match actual exposures. Unwinding of hedges can be a costly exercise and the earnings volatility resulting from hedges being reported on the P&L – because they have failed to qualify for hedge accounting treatment – can be a cause of concern to shareholders. Such problems can be avoided if long-term cash flow forecasts identify exposures accurately, enabling hedge accounting principles to be applied to each transaction.
  • Access to credit – The slow but certain shift of commercial banks away from traditional lending is reducing overall availability of credit and has resulted in a re-evaluation of internal sources of liquidity by corporates. Liquidity management is now more than good practice. As credit committees, ratings agencies and investment analysts increasingly focus on cash flow forecasts, accurate data is integral to lowering funding costs and bankruptcy risk.

These factors and others have combined to create a critical mass that is pushing multinational corporates to cast a critical eye over current reporting and forecasting processes and many have been found wanting. This article considers the key challenges for a company in implementing a comprehensive forecasting strategy and explaining why effective management of data is a crucial step toward more effective cash flow forecasting.

An almost universal hurdle that treasurers of multinational corporates must overcome is the lack of standardised global processes for cash flow forecasting across business units and regions. This is typically due to use of multiple legacy systems resulting from M&A activity and / or local variations in reporting practices and systems at subsidiary level. The common problem is that cash flow data is spread across a variety of systems and reports are not prepared according to any common template. The common result is inaccurate forecasts on which the treasurer is reluctant to rely.

Whilst the plethora of different spreadsheets used at subsidiary level to report cash flows may be the stuff of treasurers’ nightmares, even in the most efficient and centralised treasury function, the data required for effective cash flow forecasting resides in different systems. From a cash flow perspective, the best data may actually reside in sales forecasting tools but access to these and other key data sources is limited. Nor is there any guarantee, for example, that a global energy firm’s French petrol retailing business uses the same tools or reporting procedures as its wholesale gas distribution operations. In his role as global financial co-ordinator and adviser, it is increasingly the treasurer’s responsibility to find the tools to explore ways of implementing common processes and systems that support best practice. Until now, the treasurer has had to live with the fact that data relating to hedging activities resides in a separate system to cash flow information. But the regulatory imperative of complying with hedge accounting regulations is pushing the boundaries of data management and systems integration.

If we consider the different types of information required to compile short- and long-term cash flow forecasts, the scale of the challenge soon becomes apparent. Short-term cash flow forecasts are typically based on accounts payable and receivable data and balance reports from banks. Amongst many, the following questions arise: Is the A/R system delivering common reports across the company or even the region? Are local banks providing balance information as frequently as global banks? What kind of file download capability is being used, if any? Is the same instance of an ERP system being used company-wide and are interfaces with other systems fully automated? At the other end of the spectrum, long-term cash flow forecasts rely on entirely different data sets – including investment portfolios and annual budget calculations – that bring their own idiosyncrasies to the table. Furthermore, once compiled and aggregated, short- and long-term cash flow forecasting data is subject to different models and analyses. Ideally, the treasurer will be able to summon up the required information at the touch of a button, then use it to support hedging strategies, funding requirements or business growth plans. But the reality is that the greater the number of sources of data the greater the likelihood of inaccuracy and the weaker the credibility of the resulting forecasts. As such, the treasurer is left wondering, “How much trust can I put in data that has been pieced together semi-manually?”

Exerting Greater Influence

Although there are no easy answers to overcoming these data difficulties, the treasurer has the tools and the expertise to exert greater influence across the organisation’s reporting and forecasting processes, and to foster greater co-operation and integration between the centre and the subsidiary. Indeed he is uniquely placed, sitting at the apex of two sometimes antagonistic cultures (e.g. local and global), to understand the needs of both and provide a lead. Given the multiple parties involved in cash flow forecasting, this is a battle fought on at least two fronts. First, the treasurer needs the commitment of business units to process standardisation; second, he requires a means of consolidating cash flow information into a single warehouse that guarantees data integrity. In each case, technology can play a supporting role. From a process improvement perspective, Internet-based platforms help the treasurer to provide standard reporting formats and schedules, as well as lend support to subsidiaries that require guidance. From a data integration perspective, a single system for common subsidiary-level functions that also interfaces with existing specialist tools can make a major contribution to the consolidation of cash flow forecasting data. Improving data flows does not mean ripping out existing systems wholesale; a single warehouse for cash flow data can considerably reduce the effort involved in creating accurate forecasts.

As noted above, subsidiary level buy-in to accurate cash flow forecasting is crucial and as such there need to be clear benefits at this level. Whereas once the treasurer might have had to rely on the CFO to wield the big stick to reinforce reporting discipline, web-based tools bring tangible benefits on the ground as well as in the treasury. For example, deployment of a single system to handle common processes such as payments initiation, inter-company loans, hedging and forecasting eases the workload of treasurer and local finance manager alike. A key difference is that local staff can have a better understanding of group treasury objectives, and a less burdensome means of supporting these objectives. Moreover, web-based platforms can support multiple users (e.g. hundreds across local subsidiaries) at very low cost compared to previous software installations. Simultaneously as fulfilling his role of providing support and advice to the business, the treasurer benefits from the availability of accurate, detailed cash flow data in a single system, ready to be sliced and diced according to the his needs.

The application of technology in support of process improvement is undoubtedly ‘a good thing’. But the availability of detailed data collated into a single database is truly worthwhile only insofar as it offers opportunities for the treasurer to add value to the business. If we go back to the checklist at the top of the article, we can see the potential power that the data revolution puts at the treasurer’s disposal.

Sarbanes-Oxley – The ability to interrogate a single database down to the level of individual transaction detail gives certainty to the CEO and CFO as they sign off on financial statements, as required by Sarbanes Oxley for all large listed US firms – and all non-domestic US listed firms from 2006. In addition, the ability to automate and standardise the processes underpinning cash flow forecasts can also reduce the ongoing cost of compliance. Use of common automated processes for collecting and aggregating cash flow forecasts into a single repository should play a major part in robust internal controls reports under Section 404.

Hedge accounting – If all subsidiaries are able to submit standardised data on medium- to long-term foreign exchange exposures to the treasury on a timely and accurate basis, the treasury can reduce the cost of managing currency risk exposures and the improve hedge effectiveness. Ideally, once the subsidiary identifies a hedge, the central treasury can consolidate the data, net the positions and execute on behalf of the whole organisation. The means better rates, by virtue of larger transaction size, and use of the central treasury’s leverage with a global banking partner. In addition, it is easier to demonstrate hedge effectiveness if the treasurer has subsidiary level exposure data at his fingertips, preferably within a single system that already includes hedging data. With all data in one database with full audit controls and visibility, compliance with IAS39 / FAS133 becomes a vital tool in risk measurement and management not just a regulatory burden.

Access to credit – Accurate cash flow forecasting data can have a significant impact on funding costs for a number of reasons. First, the improved access to internal capital through more granular A/P and A/R information reduces reliance on banks for short-term working capital. Second, greater certainty on short-term cash flows limits the need to perform intra-day pooling. Historically, central treasuries have tended to become over-reliant on bank reporting of subsidiaries’ short-term funding requirements, particularly if they receive daily balance reporting from banks but are only able to obtain monthly reporting from local finance managers. Treasurers frequently rely on pooling structures supplied and managed by banks to identify and invest idle cash, but these are based on cleared funds at the bank rather than internal data and could leave liquidity unutilised. If cash flow forecasting data from internal sources can be improved, zero-balancing tools may no longer be the most effective means of managing working capital. But the biggest benefits are to be found in the longer term. Reliable long-term cash flow forecasts will both allow firms to reduce the contingency cushion frequently reserved to cover forecasting errors and enable better planning of funding needs. Too often, treasurers are forced to refinance at unattractive rates because the lack of clarity on future cash flows, potentially hiking funding costs unnecessarily. As well as ensuring cost-effectiveness of individual funding transactions, the ability to explore new funding options relies heavily on the supply of reliable long-term cash flow forecasts to the market.

The opportunity to improve the company’s financial position through more effective cash flow forecasting is hard to overestimate. However, there are strategic considerations that may carry even more weight. Company valuations are closely tied to future cash flows and reliable long term data can be a very powerful tool for the CFO. If a CFO has confidence in figures on consolidated futures cash flows for next five years, for example, gaining investor support becomes a much simpler task; certainty on costs and revenues provides a solid, credible platform for investment in new products and growth into new markets. In this respect the treasurer is not only enabling improved financial management at subsidiary level, he is delivering crucial support to the strategic objectives of the board. Thus, by gaining greater control of cash flow data, the treasurer – nominally the king of cash – can spend less time on counting money and more time on using his understanding of its movements in support of company strategy.

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