Best Practices for Cash Forecasting

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Efficient and accurate cash flow forecasting helps make strategic debt, investment and working capital decisions. It may also be the best technique to predict and obtain accurate ending cash balance positions a number Wall Street has come to use for measuring management effectiveness. Cash forecasting is important for all treasurers and all businesses, says Dick Sherrod, Vic e President of J.P. Morgan Treas ury Services Consulting and an expert on forecasting strategies. At the end of the day, the name of the game is how well a treasury department can manage debt and investments either by getting the best price for the debt they have to issue on a day-to-day basis , or by placing cash in the best investment vehicle to continue earning money. Forecasting is a topic that is important no matter what happens economically, but it gets increased attention when companies are cashstrapped or have a heightened concern around cash, liquidity and the vis ibility of it. In this time of tight liquidity, and with market conditions changing daily, it may be a good time to review your current approach to forecasting and, if needed, make changes to assure you get the critical information you need. As a Treasurer, there is nothing more embarrassing than to have your CFO call you to ask how much money you have and you cant tell him on a real-time basis, says Sherrod. So how can you and your company improve your current forecasting process? Sherrod suggests you focus first on establishing a disciplined approach, then setting expectations, and finally communicating and promoting the new approach religiously. Establish a disciplined approach Whether a company is grow ing, stagnant or even shrinking forecasting requires establishing a disciplined process and sticking w ith it. Most companies need to forecast cash monthly so management can answer the question of whether they had a good month or a bad one. Publicly traded companies tend to require a three-month rolling cash forecast w ith an eye toward quarterly reporting. Most cash forecasts feed into a long-term forecast as well, w ith a different team looking at capital budgeting, the budgeting/planning process (usually a fiv e-year plan) and strategic investments. Best practices: 1. Establish an ow ner for each functional area in each region (payables, receivables, credit, purchasing, sales, etc.). This is the forecasting team. (Note: it is best if the forecasting team member is the same person involv ed in the long-term budgeting process since the processes are intertw ined, and everyone can tweak their numbers along the way.) 2. Establish a standing weekly meeting, for example, 9:00 a.m. every Wednesday or whatever makes sense for each geographic region. It is important to establish and maintain the discipline of weekly meetings, even if you choose to cancel the meeting w hen there are few changes. Key stakeholders must be present or on the phone each week. The goal is to target month-end projections, and each meeting w orks toward refining those projections. 3. Establish and distribute unif orm information-gathering templates for all regions (these templates should not vary by region). Whatever people are doing in Asia, the people in Europe should be doing the same. Some of the terminology can be different, but the platform used should be fungible so the data can be merged into one global forecast. 4. Require each region to use the template, reporting in their operational currencies and either build a currency conversion into the templates or have regional shared service centers consolidate information by currency. Use your ERP system conversion rate to convert to a single currency, your primary functional currencies, or both depending on your needs and requirements. 5. Within the template segregate or highlight signific ant and recurring quarterly items that do not change much to help focus time and attention on the important areas of weekly, notable changes. Payroll, debt obligations that pay every quarter, or routine items such as interest payments on large revolving debt are areas that typically do not require much time or attention from your reporting teams. Set expectations and establish accountability Once the forecasting team and approach is established, or an exis ting approach is modified, the forecasting team needs to set expectations about forecast goals. Typic ally, it is not necessary to know every small item going in and out, so break down forecasts to the bulk amounts of data needed by category (e.g., cycles, trends from month-to-month or week-to-week). Best practices: 1. Establish a primary point of contact in each region, and centrally, in case someone in the field learns about a big sale or purchase betw een reporting cycles. These individuals are responsible for immediately communicating significant changes to the owner of the forecasting process. 2. Establish discipline in how and when you use your ERP systems. ERP systems are wonderful tools that consolidate and aggregate information worldwide, if your forecast relies upon your ERP system and someone gets an invoice, puts it aside and does not enter it immediately, the forecast will be off. Timely input into accounting and ERP systems is one of the biggest problem areas J.P. Morgan sees in companies. The obvious best practice is to enter every invoice and purchase order daily along the w ay, but establishing expectations and accountability that works for your company is key to successful forecasting. 3. Whether you hold divisions accountable by region, by line of business, or by function, it is important to call out when someone is not providing the right information. If lack of reporting caused the CEO to report a $100 million sw ing in cash, make sure the key contacts know it and understand the ramifications. For example, w as a Wall Street or a board expectation compromised? Highlight cash generation and usage by unit or region w ith some kind of measurement. Highlight forecast anomalies and misses to focus more attention on them for the future. For instance, you can show that Europe was $200 million off on their forecast and ask them to explain. Calling out smaller discrepancies and inconsis tencies early may avoid a bigger

mistake later. Feedback is tw o-way, and it is important to consider establishing a way for participants to talk about what works and what does not. Develop and m aintain a strong communication strategy After establishing an approach, setting expectations and providing a feedback process, the next step required is communicating. For cash flow forecasting to be effective it must be recogniz ed across the firm and it must be clear that it is a strategic part of the overall operational business. A good communication strategy can effectively deliver the message of what you want and why. Best practices: 1. Since the CFO and treasurer are the key accountable stakeholders that desire accurate cash flow information and reporting, they need to be responsible for clearly communicating the forecasting process and requirements. That means they should send a written communication that outlines expectations including templates, due dates, variances and accountability to every person in the company involv ed in reporting. 2. The manager leading the forecasting effort should get out and meet the people the forecasting team relies on. The goal is to demonstrate the value of forecasting from a strategic point of view and explain the ramifications of poor forecasting. People who work in accounts payable may not think they need to report to the treasury department about the $10 million about to go out the door. Someone purchasing new equipment may not think about the implications to treasury of that purchase and when the invoices are due. Sitting dow n face-to-face with purchasing agents, sales, marketing and others to build rapport can help achieve your goal of a good, effective forecast. 3. Never stop communicating. Send reminders of when updates are due until the process takes hold. If you establish a recurring time each week when forecasts are due or when weekly meeting are held, send a reminder. At some point it w ill become so routine as to recur on everyones mental calendar as well. Reap the Benefits After all the hard work, treasurers can begin to reap the benefits of forecasting, which include:

Keeping abreast of key decisions made in the firm. Is there anything more frustrating for a treasurer than to find out at the last minute that they have to come up with tens of millions of dollars or have tens of millions of dollars coming into their cash arena w ithout planning? Becoming more of a strategic player in the firm. The value of forecasting has moved from obscurity to main stream, primarily because CFOs and CEOs are expected to know what their cash flows are from quarter to quarter. Effective cash forecasting is about being intimately involved in the strategic decisions going on within the company and having discipline around reporting the impacts of those decisions. Helping achieve advantageous debt and investment rates.

Getting your firm on the right track to excellent forecasting may take several months, several communications, leadership and some training. But remember that forecasting is a discipline, and implementing the right process often requires changemanagement skills and time to gain buy-in and reinforce your needs. Once established properly , it w ill simply become business as usual, and the treasury department can focus on making cash management decisions based on sound information.