Published: February 01, 2010
Every corporate in recent years has recognised that producing timely, accurate and consistent cash flow forecasts is essential for liquidity risk management. While planning and budgeting are essential disciplines, cash flow forecasting is a vital early warning system to highlight early signs of financial distress and enables the company to respond to potential liquidity challenges and act on opportunities before they become critical to the business. In this article, Jukka Ryhänen, Group Treasurer of Finnish chemicals company Kemira, discusses his experience of optimising cash flow forecasting at his company.
Group treasury at Kemira fulfils a variety of functions within the company, particularly securing funding and liquidity while minimising risks and costs, and providing value-added services to business units, of which there are nearly 150. Cash flow forecasting is one element of this role, but one of the most difficult. Until 2000, like many multinationals, we were struggling to produce accurate forecasting in a consistent way, with multiple channels for collecting data, unpredictable timing and missing information. Forecast reports needed to be produced manually, which was time-consuming and prone to error. Our bank account structure was confused and although we had a cash pool in place to centralise cash as far as possible, we still had €50m in accounts outside the cash pool, which meant that our borrowing levels were higher than necessary, and our use of cash was not optimal.
We recognised that there were two elements to addressing our cash flow forecasting challenges: firstly, revising our processes and enhancing the integration between systems (straight-through processing) and implementing a new system for cash positioning and forecasting to help standardise our processes, reporting and collection of data. Although our banking partners had technology they could offer us, we preferred to license a system that was bank-independent.
Having reviewed various options, we selected Trezone, a solution provided by the Finnish company Exidio. In addition to the company’s experience with Finnish companies, the cash flow forecasting module provided structured templates for inputting for forecast data, import capabilities from both external and internal systems, standard reports, and greater security and control. As a web-based solution, Trezone was easy to use and did not require a technical installation, which meant that the implementation was quicker and required less resource. Furthermore, Trezone had other capabilities from which we could benefit, including support for a simple netting process, intercompany transaction management and the ability to collect information on FX exposures from business units. We decided it would be convenient to have these capabilities delivered through a single solution.[[[PAGE]]]
Cash flow forecasting is a vital early warning system to highlight early signs of financial distress.
The implementation of new technology and revised business processes have had a dramatic impact on our ability to position and forecast cash effectively, and we have been able to reduce our idle cash dramatically (see Figure 2), with the resulting reduction in borrowing and greater ability to use our cash more strategically; this has become even more important over the past 18 months since the start of the crisis. Tangible savings have been made in other ways too. In 2009, we were able to close around 30 bank accounts, with a saving of around €500 per account in bank charges each year, in addition to saving time in administering these accounts. In addition, we estimated that we have saved around €100,000 each year in resourcing costs as a result of implementing a more efficient forecasting process.
Our ability to manage risk has also been enhanced as a result of implementing new technology and processes. For example, improved data quality and a reduction in manual processing have reduced our operational risk. By achieving better visibility over our cash forecast and enhancing our ability to forecast our cash accurately, we are in a better position to manage our liquidity risk. Finally, by streamlining our business processes and improving the punctuality and reliability of reporting, we have reduced compliance risk.
As with every company, the financial crisis has resulted in challenges, although we have not needed to refinance over this period. However, we have used the opportunity to refine the way that we use Trezone, and enhanced both cash flow forecasting and management reporting, such as net debt, cash position and medium-term forecast reports. We have also made use of data more extensively to manage our debt portfolio more effectively.
Over the past few years, in addition to implementing Trezone, we have been implementing SAP across Kemira. As a company with complex treasury and cash management requirements, particularly as a result of our entity structure, we think it would be too expensive and resource-intensive to implement SAP to replace the activities that are currently undertaken using Trezone. However, we may make more use of SAP in treasury as we look at implementing a European payments factory, which is becoming a more viable proposition with the introduction of SEPA.
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
