- Treasury groups often spend too much time mechanically putting together cash forecasts without addressing structural issues that could make forecasting more strategic. - Cash forecasting should provide a deep understanding of cash flows to optimize working capital, identify excess cash, model business risks, and inform expense management. - Effective communication is needed, including quantifying forecasting challenges and errors to executives, and explaining the opportunity cost of inaccurate forecasts to business units. - Reliable forecasting requires consistency, tying forecasts to financials, addressing variances, and avoiding errors from assumptions, manual processes, or lack of driver analysis.

1. November 2015
Association for Financial Professionals’ Monthly Magazine
Piece by Piece{IStrategic treasury and finance
demands thorough planning
Migrating to a treasury management system
Strategic cash forecasting
Is there value in faster payments?
Plus: New Certified
Corporate FP&A Professionals
iv

2. Volume 35November 2015
contents
features
8
2015 Pinnacle Grand Prize
A look at Hilton IVorldWIde's
Winning entry
Andrew Deirbler
12
Fast Talk
Do treasurers see any value
In faster payments?
Andrew Derek/(r
l4
Dangerous Territory
Bank compliance lS a big challenge
in high-risk areas
Andrew Det'e/J/er
16
AFPAware
Treasury and finance profeSSIonals
volunteer to make a difference
Andrew Deli/71a
20
Starting Over
After five years In treasury, John Frum
returned to hlS FP&A roots
jane Fitzgerald
40
Changin Forecast
Turn cash gorecastlng Into a
strategic tool
Aml’ur Blmndan
43
Communication Breakdown
Why IS there no t'ionsistency in
deli xenng flnanCIal reports?
Ant/r17 I n/m/ne
48
Strengthen Your Core
The strong dollar has
some firms strengthening
their capital structure
Dem'xe Bede/I
50
Grim Outlook
The weakened euro has
treasurers porl‘o‘errng
their next move
john Hintze
52
Time to Change
Why one Organization migrated
to a treasury workstation
Ke'lz'in “TI/Ion
Number 9 www.AFPon|ine.org
Flt/i'1'!) 8.1713111!)
58
Real Problem
Seven ties ‘53! hedging
the Brazian :w‘rencx
Xi!) Eur/{ex
l.ife‘s a Breach
'ho CISC and C50
must o: L' together
r."'1._"r [ital/uh;
64
Newly Certified Corporate
FllL‘lnCl-Jl Planning t"
Analysis Protcssionals
.*l'lnlmcME: AF? [J‘I'Imnu‘ l l

3. Tum cash forecasting mto a strategic business to
KEY TAKEAWAYS:
- Treasury groups spend too much trme mechamcallV y puttln to c
wrthout adequately addressmg structural Issues that can magkefgoertel'lcearstransgh ifnotroecastts every montha s rategic business
- Two types of communication are key—upward and d
.
ownwar
cash forecasting m perspective and create a framework for ad'ddtreospsruntgththe
Importance and challenge
ese‘
- Consrstently forecasting short-term/medlum-term
I
cash balan ‘ - _
understandmg of cash flows. and this process should be top-dcoewsn'sannedxtbtottnmpossmle
without a d
0 om'UD with constant
scrutiny and Improvement.
40 I All‘ Iit't/mugz' ‘wu mlm UH ~'

4. n all my years restructuring cash forecasting systems
of Fortune 500 corporations. I have rarely seen
a treasurer who was completely satisfied with his
or her forecasting process. I have heard more than one
CFO my. “1 don't get it. Why is this so difficult?", and have
heard responses that vary from “collections volatility” to
blaming regions/business units. Treasury groups typically
spend too much time mechanical‘ly putting together cash
fo'reclsts every month without adequately addressrn'g three
tun‘danviental' structural issues that can make forecasting
into a Strategic business tool.
Over the years I have devised some practical solutions to
the challenges treasurers face. In this article we will discuss
the strategic construct that needs to be put in place and
list the common errors. in oash—management forecasting
processes. The atond part of the series will go into going
deep and setting up a good GlSl‘l forecaSting system.
Expect more
The cash forecasting process offers treasurers the
opportunin" to reach out to the business units and dive
deep into numbers. especially surrounding working
capital needs. This also presents an opportunity to create
logical role expansions of the forecasting process to make
a strategic impact on the business.
Since cash forecasting entails a deep understanding of
the volatility ofca‘sh balances and needs, it should lead to
a quantification ofthe minimum cash needed to run the
business in total and per business unit. It should facilitate
identification of excess and trapped cash and creation
ofplans to minimize these and improve efficiency and
velocity of cash.
A detailed understanding of the composition of inflows,
outflows and cash flow drivers is necessary for cash
foretas‘u'ng. This should be leveraged to optimize working
“Pilfil. cg. an effort to forecast inventory led to detailed
analysis ofinventory volatility and highlighted areas of
inventory rationalira'tion. improving collection systems,
Processes. etc. It could also mean deploym‘g working
Capital. e.g.. leveraging supplier discounrs/negotiating
economically Favorable collection terms, etc. These can also
hClP Pro‘ide potential expense saving opportunities.
The cash ltW‘L‘CASI should provide a framework for
"iodeling business drivers and their impact on caS‘h flow
variance for enterprise risk management I‘ERMi. It should
help model contingency liquidity planning' including a
framework for modeling credit and interest rate in
financial institutions.
Cash forecasu'ng can also provide an information
repository for effecting expense management in' case“ we
create mathematiatl models to serve as secondan,‘ input
for expense forecasting based on a mini—data warehouse of
prior expenses.
Explain better
Two types of communication are key—upward and
downward. to put the importance and challenges of ash
forecasting in perspective and create a framework for
addressing these.
Upward communication
There are three important objectives here:
communicating challenges in cash forecasting quannfi'ing
the margin oferror; and clarifying the forecasting plan."
cost of quality. These should be clear to not iust the CFO
but the CEO. especially in. times when cash is scarce.
Challenges:
How are cash forecasts different and more complex
than P&’L forecasts?
Variance is impacted by both Poll. changes and
balance sheet movements, many ofwhich are
random. Treasurers often find it impossible to
quantify variance due to purely random factors.
Percentage of error is calculated off the cash balance.
which is a small percentage of the bigger drivers. 50
a small percentage miss on the collections loch huge
when compared to the cash balance‘.
Executive sensitivity is further heightened ifash is in
short supply.
Lower organizational focus on cash forecast‘ing than
forecasting earnings: business units are often not
incented on cash flow. so it is sometimes difficult to
get them to focus on this" metric.
It is" a pom't—o—fum'e measure. so any idi"os}mauc'
movement can throw the number off (even- if the next
day things falil into place since the ending" ~41le~ balms
15' all that matters). This is true of-imr-md
“MM‘AFPonlinefirg Amati”

5. . orecasting
Margin of error:
Quantify the endemic randomness in the numbers.
° Many random factors like FX movements, unpredictable
collections volatility, system limitations to predict
inventory, etc. can have a meaningful impact on the cash
balance at month—end.
' It is often possible to quantify this randomness based on
mathematical models. This process often also highlights
ways to improve predictability and lay out thresholds
over which differences are statistically significant.
Cash forecasting plan:
This needs to define how the individual forecasting
challenges will be addressed.
' The plan should lay out the cost ofquality, e.g.. the
fact that a company will need to invest in a perpetual
inventory system to bring down inventory forecasting
beyond a point.
Executive management support will also set the stage for
downward communication to the business units.
Cash forecasting takes a while to mature in any
organization and this is a good opportunity to lay out
short and medium—term deliverables, any FTEs needed,
or additional short-term fixes that may need to be put
in place to tide over short—term challenges—eg, special
updates from regions closer to quarter/year—ends etc.
Downward and lateral communication
It is not unusual for business units to make cash forecasting
a lower priority since they do not understand its importance.
Oftentimes treasurers are unable to communicate the reason in
a manner business units can relate to.
One method I have found helpful is to explain how
unreliable cash forecasts force us to plan for the worst—case
scenario and result in keeping a higher cash buffer. The
opportunity cost ofa higher cash buffer can be quantified in
terms of foregone EBITDA on account of capex, foregone
M8CA opportunities, or EPS from stock buybacks, etc. This
is a very powerful tool for getting the message across the
business. This communication is obviously strengthened
if there are capital efficiency targets in place across the
organization like ROI, EVA, etc.
Go deep
The key message here is that consistently forecasting
short-term/medium—term cash balances is next to
42 l AFP Exchange November 2015
~ ‘ ' iderstandin o
impossrble Without a deep ui g {Cash HOWS)
his process should be top—down and bottom—uP
t scrutiny and improvement. Here are some
and t
with constan
commonly made mistakes in cash forecasting:
Trend based:
Replicate trends in the prior years in collections and
payments with some high—level changes in revenue/expense
forecasts. While there is some merit to this in seasonal
businesses, these are way too inexact to be of any real
value. These are useful as secondary indicators where the
fundamentals are driven by grounded analysis by individml
business units.
High—level balance sheet assumptions applied to
budget around inventory, DSO etc. without clear
understanding ofthe drivers of these variables. This is
typically an error that happens in the FPt‘ScA shop and
happen when cash forecasting is handed over to FP&A,
sometimes been-ruse treasury is unable to do a satisfactory job
01] cash f(~)l‘C(.}'15[llig.
No tie-in with P&L forecasts:
The other extreme of the problem is when cash flows are
not tied in with P&L forecasts. This sometimes happens
when treasury alone is responsible for cash forecasting;
direct cash forecasting is done by regional treasury staff and
may be handled by someone not connected to the FPESCA
process. Oftentimes this is a recipe for gloomy forecasts
since they assume expenses remain the same and collections
decline over a period of time in the name of conservatism.
Needless to say. since more than a few people are
conservative, the long—term forecast is entirely unreliable.
Sub-par variance analysis:
Variance analytics not done in—depth/not reported on to
avoid confrontation.
Excel-based formula/consolidation errors:
This is more common than one would imagine. I
have witnessed consolidation errors on more than a
few occasions.
We have laid Out the initial framework that needs t0
be in place to create a reliable cash forecasting process—e
strategic objectives, strategic communication and a deep
understanding ofwhat it will take to get the job done.
Ari/em B/mmfim' is vicepie-side”: and treasurer (It Omniu‘m’ Im‘.