Commentary
There are few subjects on which all treasurers agree. Cash forecasting is one: everyone agrees it is difficult, painful, and rarely accurate. And that is just the “easy” part, forecasting the short term, i.e., up to three months.
What happens when you reach out into the distant future – the medium and long term cash forecast? Surely, this is vital, if nothing else, so a company can plan its dividends and debt raising or repayment in advance? But it quickly becomes difficult, as techniques start to diverge. The best short term forecast is done looking at actual cash, and mapping out the expected receipts and disbursements. Beyond three months, this generally doesn’t work, as actual payments and receipts become less certain. People start to look at the strategic plan and try to work out the likely cash impacts – most treasurers view this as being less operationally relevant. Also, some people take input from the operating units and consolidate it, while others take a “tops down” approach.
In fact, the call started with a healthy discussion: why do a longer term cash forecast at all?
- For several peers, cash and funding was not a real issue. In this case, a good cash forecast may enable, say, $150,000 of saved interest expense by eliminating buffers and avoiding unnecessary borrowing. But, if it costs more than $150,000 to produce this good forecast, what is the benefit?
- Other peers had really tight cash situations, were trying hard to maintain a favourable credit rating, or needed to meet the cash targets of private equity owners. In these cases, a good cash forecast was an operational necessity, and cash generation was often a significant KPI.
- In all cases, the view of management was an essential consideration. Without full senior management support, a good process is more or less impossible, since it requires a lot of work and cooperation by different functions.
- Group structure is a big factor. Where funding is done locally, a group cash forecast is not necessarily useful: in this case, what matters most to the group is managing local debt levels and the amount of cash being remitted to HQ. Local entities are usually motivated to do a good forecast.
So, how do peers handle this thorny issue? - Please Register / Log In to read the rest of this commentary
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