Published: February 01, 2013
There is great potential for corporations to increase financial performance by optimising their cash flow forecasting. Analysis within our client community highlights that through the implementation of best practices, organisations know exactly where their cash is, are able to optimise their cash, and can manage liquidity risk more effectively. Specialised technology helps corporates to leverage significant efficiency gains. Manual tasks in the collection of data and in reporting are reduced through highly automated processes, and corporations achieve true global visibility of their cash and forecasting objectives.
During the financial crisis, corporations learned, some the hard way, the value of placing more emphasis on effective cash and liquidity management. In times when the banks became increasingly restrictive in their lending policies in providing cash to corporations for smoothing any gaps in their cash flow curve or for investing in business development, corporations instead had to turn to their own resources and eke out every free penny. In order to mobilise their own resources, corporations need to have reliable data representing their actual and expected cash position. Thus, if companies achieve greater efficiency in their accounts receivable and payable processing, they are laying a solid foundation for a strategic liquidity management structure: the more clearly they know where their cash is and what their cash requirements are over a certain period of time, the better they can steer their corporate ship through otherwise murky waters.
Without efficient cash flow forecasting, companies cannot analyse, track, and manage risk exposures that continuously challenge treasury. Maintaining optimal levels of liquidity is crucial for ensuring the continued success of a corporation. If companies have too much unused cash lying around in bank accounts or even in corporate in-house accounts, they will lose out on interest earnings and may even have to pay interest fees for external capital. If, however, corporations continuously operate under their minimum liquidity requisites, the consequences are worse and they risk bankruptcy or foreclosure.
Securing corporate liquidity
Although not all corporations can be measured by the same means, it can be said that companies with a solid liquidity reserve are in a stronger position to get through financial demands than those without sufficient reserves. Having suitable cash in the appropriate currency to meet obligations at all times is one of the key strategic aims of a corporation to secure sufficient liquidity in order to safeguard business operational demands. An efficient and company-wide cash and liquidity management is crucial in achieving this objective.
Optimising working capital management
Effective cash and liquidity management is again at the top of the corporate agenda. Corporations had to revert to their own internal resources to get through the crisis. Tracking and optimising internal resources continues to prove to be a successful initiative in reducing the dependency on external funding and counter market challenges. The first key priority is to understand clearly how much liquidity a company has across all accounts, globally; this baseline will determine optimisation potential for using cash more effectively and streamlining internal processes. As a result, working capital will be optimised: deficient accounts of one corporate subsidiary can be offset with the surpluses of another subsidiary, and surpluses can be invested – not just in short-term solutions but also in more strategic long-term solutions. By optimising overall working capital management, corporations will also achieve the second key target of efficient cash flow forecasting: reducing the costs that are related to retaining high(er) levels of liquidity.
Getting the optimal level of liquidity right
Keeping the balance between too tight or too high levels of idle cash is one of the key challenges of liquidity management. A cash reserve is always necessary to cover the company’s overheads, to meet credit rating requirements, and to provide a buffer for investments as well as any unforeseen events. While it is a pretty straightforward matter to measure the liquidity requirements for purchases, overheads and credit ratings, it is more complex to plan liquidity requirements. Events such as unexpected market dynamics, natural disasters or political instability are highly uncertain variables which are highly difficult to predict. However, a cash-flow based liquidity plan could incorporate many of these uncertainties, even the unpredictable events, by leveraging best, worst and average case scenarios.[[[PAGE]]]
Improving credit ratings
In addition to mobilising its own resources, efficient cash flow forecasting also helps to strengthen the credit rating of a corporation. After the liquidity crisis and in the light of Basel III, banks have started to request more information from corporates applying for credit such as transparent cash flow analyses. These analyses are one of the key indicators demonstrating the financial health of a company and its ability to meet their obligations and to cope with unforeseen events. Therefore, cash flow forecasting increasingly influences the external financing alternatives available to corporations.
All the more surprising is the still widespread use of Excel for managing liquidity. Sure, it is easy to use, but it does not offer corporations the flexibility and efficiency to quickly anticipate and react to new challenges and the ever changing external factors and influences. Moreover, the often manual data collection in Excel and the generation of worksheets from the data is not only risk prone but also very time-consuming. Instead of focusing on analysis and reports to support the strategic decision making of corporate management, treasurers and cash managers are burdened with laborious and manual tasks. The more complex and global the structure of the corporation, the greater the efforts are for the central treasury to collect and merge all data correctly and quickly. Due to the diverse structures and applications, corporate governance, local regulations and reporting requirements, treasurers are faced with significant challenges.
How much could be gained with a professional solution for cash and liquidity management that automatically retrieves the relevant data from multiple divisions and applications is clearly reflected in the experience of our Hanse Orga customers. As stated by one, “Our Treasury Analysts now have their liquidity data available first thing each morning. We have already achieved an automatic assignment rate in our forecasting of 99.975%. Further, as a result of automating our processes, we also have significantly increased our capacity to track over 300 plan groups and are, thus, able to conduct variance analyses at a more detailed level.”
Corporations increasingly recognise the potential of professional solutions, and trends show that treasuries are placing greater emphasis on efficient cash flow forecasting and are increasingly investing in professional solutions to obtain a clearer picture of company-wide resources.
Benefits of specialised technology
The change is here. By deploying specialised technology, which ideally is fully embedded in a centralised ERP system, for example SAP, corporations have the inside track when it comes to efficient cash flow forecasting. With an integrated solution, all balances of the company’s subsidiaries are automatically, without any risk-prone interfaces, incorporated into a single cohesive view. Indifferent of the types of systems, languages, currencies, or local conditions, the subsidiaries’ data is taken into account and seamlessly combined to enable global visibility. Automated processes reduce the time-consuming manual transfer of data from one source to the other and ensure reliability of data. International corporations benefit from time-saving, automated technology that enables a comprehensive and company-wide overview in real time.
The actual financial situation of a corporation becomes visibly manageable, and cash flow forecasting is based on solid data instead of best guesses. This drives efficiency gains and allows for a reliable performance analysis of the corporation’s subsidiaries, business operations, products, and other management elements.
Checklist for selecting specialised cash forecasting solutions
A professional solution for cash flow forecasting should provide intelligent features that afford corporations the following benefits:
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If corporations want to leverage best practices, it is imperative to maintain efficient and effective cash flow forecasting. A central and real-time overview of company-wide cash positions forms the basis for accurate strategic decisions, and internal as well as external resources can be mobilised more easily. Next generation ERP-integrated software solutions automate manual tasks and ensure optimal levels of liquidity and provide transparent and compliant data to meet the directives and objectives set by management.
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