Effective Cash Forecasting: Less Complicated than You Think!

Transcription

1 Effective Cash Forecasting: Less Complicated than You Think! Presented To New York Cash Exchange June Treasury Strategies,

2 Today s Speakers Jeff Diorio Director Treasury Strategies Thomas Gavaghan Manager, North American Presales Kyriba Corporation Sam Pallotta Vice President and Treasurer The Rockefeller Group International

3 Agenda 1. Framing Forecasting Objectives Issues Benefits 2. Best Practices 3. Case Study: The Rockefeller Group 4. Leveraging Technology 5. Conclusion

4 Forecasting Issues, Challenges and Approach

5 Forecasting Importance Rank 2017 Rank 2016 Rank 2015 Cash forecasting Financial risk management, FX Treasury staffing levels and skill sets Treasury functional organization Treasury management systems Bank relationship management Best practices Operational efficiency Balance sheet optimization Bank service fees Source: Treasury Strategies 2017 State of the Treasury Profession survey.

6 Forecasting as a Priority Because Avoids liquidity and capital issues Maximizes the value of cash Improves the effectiveness of risk management Returns value to stakeholders Improves the financial performance of the company Supports Treasurer s contribution to strategic planning

7 Why are there Barriers to Overcome? A majority of organizations indicate they are less-than-satisfied with their cash forecasting processes and forecast accuracy Many organizations face the same kinds of forecasting challenges Insufficient resources Poor information access/exchange GIGO (accurate data sources) Organizational complexity Ineffective forecast methodology, tools Poor internal knowledge of cash flows Low priority by senior management Inconsistency between short-term cash forecast and budget

8 Capital Budget vs. Liquidity Forecast Business Strategy Budget Liquidity Forecast Capital Structure Budget Top-down (FP&A) vs. bottom-up (Treasury) approach to liquidity 8

9 Reconciling: Budget vs. Liquidity Reconciling budget cash with liquidity cash is difficult there are differences Budget Liquidity Pro Forma Financials GAAP Accounting Ledger Balances Long-Term (1 5 yrs) Periodic Updates Manage Liquidity Actual Cash Available Balances Less than 1 year Frequent Updates Different goals Different perspective Different measure of cash Different time horizon Different schedule 9

10 Spreadsheet Limitations Spreadsheets are easy when your forecast is easy Become less effective when integrating data sources Not truly multi-user Lack controls Lack audit trails Can t store multiple versions e.g. variance analysis Poor business continuity Domestic1Cash1Forecast Beginning1Balance1(MMF) Cash1Activity Expected=Receivables Expected=Payables Expected=Payroll Netting=Payments/Receipts Treasury=Wires IC=Payments/Receipts= Borrowing1Activity CP=Maturing CP=Issuance 7/14/14 7/15/14 7/16/14 7/17/14 7/18/14 7/21/14 7/22/14 Mon Tue Wed Thu Fri Mon Tue (30.00) (30.00) (30.00) (30.00) (30.00) (30.00) (30.00) (50.00) (10.00) (651.00) (11.00) (100.00) (125.00) (125.00) Ending1Balance CP=Outstanding (250.00) (625.00) ( ) ( ) ( ) ( ) ( ) All#balances#are#in#MM

11 Forecasting Best Practices

12 Why Forecast? High-level blueprint of the company s financial future Ensure access to adequate capital cash and credit - Short-term à Liquidity planning [Treasury] - Long-term à Capital planning [FP&A] Ensure effective working capital management: Is cash effectively deployed? Effectively manage risk: Where are we exposed (FX, interest rate)? Design a capital structure that supports business plan Anticipate impact on earnings, profits, EPS 12

13 Treasury Forecasts Treasury can have multiple forecasts different time horizons Objectives Near-Term Medium-Term Long-Term Daily cash positioning Invest/borrow decisions Liquidity planning, borrowing decisions Long-term capital management and earnings protection Horizon 1 4 weeks weeks months Detail Most granular, account level details Medium Summary level detail; focus on balance sheet, business categories Frequency Daily Weekly Monthly or Quarterly Update Intraday, as needed Weekly Monthly They should be linked, but all have different objectives and uses

14 Focus on Your Goals Big picture Increasing investment income - reduce idle or underinvested cash balances and increase returns on cash Reduce debt and associated interest expense Improving FX hedging effectiveness Minimize excess cash balances Repatriating cash from overseas Working capital improvement Clear objectives Audience Time frame and frequency

15 Case Study: The Rockefeller Group

16 Case Study- Rockefeller Group International The Rockefeller Group is a leading real estate developer, owner and investor, known since the development of Rockefeller Center for pioneering large-scale urban mixed-use development. For nearly nine decades the company has been trusted for its financial strength, stability and vision, and today remains committed to the selective acquisition, management and development of innovative, high-quality office, industrial, residential and mixed-use properties in urban centers and strategic distribution markets. GOALS SOLUTION RESULT Forecasting tool to project future cash flow to support investment activity Ensure sufficient nearterm liquidity was in place to fund urgent cash needs As needed, raise company s borrowing capacity to support investment goals Change corporate culture so that liquidity was not taken for granted Create a robust cash forecast that would educate the company to its upcoming cash requirements Identify key variables driving cash movements Solicit direct input from business lines spending and receiving cash Analysis of historic business trends and statistical smoothing Wide communication of forecast Short-term cash forecasting allowed us to avoid urgent cash needs and have funds readily available Long-term borrowing requirements identified in advance of Planning cycle Allowed us to access capital markets and raise long-term revolver before Great Recession took hold Improved communication between senior leadership driving investments and Treasury department By improving our cash forecasting we identified a need to raise a $500M revolver and closed the facility in August Just a few weeks later, Lehman declared bankruptcy. If not for the advance knowledge our cash forecast provided, our company s financial strength could have been compromised. - Sam Pallotta, VP & Treasurer

17 Case Study- Rockefeller Group International The Rockefeller Group is a leading real estate developer, owner and investor, known since the development of Rockefeller Center for pioneering large-scale urban mixed-use development. For nearly nine decades the company has been trusted for its financial strength, stability and vision, and today remains committed to the selective acquisition, management and development of innovative, high-quality office, industrial, residential and mixed-use properties in urban centers and strategic distribution markets. GOALS SOLUTION RESULT Identify pools of trapped cash and if they can be liquidated If not, improve cash forecasting of each cash silo to understand liquidity requirements Improve cash investment policy to minimize the negative carrying cost of trapped cash Worked across company to understand rationale for pools of cash Identified cash silo that could be unwound, freeing $10M of trapped cash Created a separate cash forecast for largest pool of trapped cash Realized that funding needs were not immediate and created a cash investment portfolio to maximize returns Reduced trapped cash by approximately 30-40% Reduced borrowing costs by improving liquidity and paying down unneeded debt Improved return on investment through an improved cash investment strategy by 0.15% % Better understanding of cash needs allowed us to go out the curve and pick up additional yield Our company was able to leverage prior success with cash forecasting to attack pools of unproductive trapped cash under an accelerated timeline. The effort generated positive operating cash flow, reduced borrowing cost and improved investment yields. - Sam Pallotta, VP & Treasurer

18 Building the Forecast and Leveraging Technology

19 Determine the Forecasting Approach Two distinct approaches 1. Direct (build from data) Specific known upcoming cash flows Estimate from history 2. Indirect (top down) FP&A approach

20 Liquidity Forecasting Cycle 5. Refinement Forecast Refinement Process Data Sources Business Units Financial Units 1. Data Gathering 2. Execution 3. Variance Analysis & Analytics Internal Systems Bank Data Centralized Collection Tool Forecasting Model Variance Analysis 4. Reporting Output Reports to Users 20

21 Hierarchy of Data Modeling Actual (source) Data Recurring Flows Simple Projections Complex Modeling 21

22 Find the Right Data Sources Bank Reporting Spreadsheet Models ERP Cash Forecast Business Units Investments and Debt Historical Data Derivative Positions Payments Internal Teams Effective forecasting Choosing the right sources and models for the different forecasting line items

23 Importing Cash Flows Importing cash flows doesn t need to be an IT exercise System should take any format and file structure without IT help Want to import detailed numbers and/or import sum totals and spread across days Accommodate versioning of forecasts Thoughts Leverage what you have ERP, Hyperion, FP&A tools Focus on automated translation and load (ETL) vs manual Include data repository owners in conversations

24 Recurring Cash Flows Repetitive cash flows can be modeled for any frequency, with variability by day, week, month Best used - create a placeholder Later replaced with more updated forecast data from other sources

25 Simple Modeling Projection of Data Typical Workflow 1) Decide action and adjustments (e.g. average or trending of historic flows) 2) Select historic cash flows to extrapolate forward (dates and filtered query) *Visibility* 3) Determine date/periods to project forward

26 Complex Modeling Seed Process (annually) 12, 24,36 month time-series Regression analysis to determine factors Model in system to apply factors to data Forecast Process (Montly, Quarterly, Weekly) Apply adjustments for next cycle Run forecast Variance analysis to determine adjustments Load actuals 26

27 What-if Scenario Analysis Building scenarios upon existing forecasts Changes in market conditions à impacts sales, supplies, inventory Changes in interest rates à impact on cost of debt Changes in FX rates à impact on exposures

28 Assessing Forecast Accuracy

29 Variance Analysis: What was Different? 1. Perform variance analysis Forecast to Actual Forecast to Forecast Multiple frequencies 2. Analyze forecast effectiveness By line item By time period 3. Report back to data sources or review model 4. Update the forecast with improved data 5. Rinse and repeat 29

30 Forecast Accuracy Analyze Forecast Eeffectiveness Require detailed variance analysis to find the discrepancies Need multiple frequencies 3 month assessment insufficient Data visualization can be easier to target problems

31 In Summary

32 Cash Forecasting Conclusions Many reasons to forecast: Meeting the objectives of management and shareholders is critical. Cash Forecasting is important if you are cash rich. Multinationals with significant foreign revenues must forecast better in order to hedge effectively. Creating the cash forecast. Understand the objectives and benefits before rolling out cash flow forecast exercise. Flexibility to align your data, the accuracy of the inputs will determine the best methods to build your forecast effectively Measuring the forecast is the most important part of forecasting. Without measuring forecast accuracy, it is impossible to know if you are good at forecasting. ROI of cash forecasting is very high. Can be measured by investing longer with higher returns on cash, repaying debt, earning yield from early supplier payments, and the value of foreign cash protected through effective hedging

33 Cash Forecasting Final Thoughts 1. Comprehensive mapping of all cash flows and strong understanding of cash flow volatility drivers 2. Strong communication with providers of information 3. Tools that support data gathering, modeling and consolidation 4. Dynamic trending and variance analysis tools 5. Accurate assessment of aggressiveness/conservativeness level Evaluate the consequences of inaccuracy Review actions taken based on forecast

34 Questions? Jeff Diorio Thomas Gavaghan Sam Pallotta

35 About Treasury Strategies Treasury Strategies, A division of Novantas, Inc., is the leading treasury consulting firm. Armed with decades of experience, we ve developed solutions and delivered insights on leading practices, treasury operations, technology, and risk management for hundreds of companies around the globe. We serve corporate treasurers, their financial services providers and technology providers for the complete 360 view of of treasury. Solutions Global Cash and Liquidity Management Cash Forecasting Financial Risk Management Treasury Organization Payments Strategy Leading Practices Review and Benchmarking Bank Relationship Management Technology Business Requirements and Gap Analysis Technology Optimization and Updates Technology Selection Technology Implementation and Connectivity Treasury Change Management and Resource Support Connect With Us

36 About Novantas, Inc. Novantas is the industry leader in analytic advisory services and technology solutions for retail and commercial banks. We create superior value for our clients through deep and insightful analysis of the information that drives the financial services industry across pricing, product development, treasury and risk management, distribution, marketing, and sales management. With more than 200 professionals, Novantas and Treasury Strategies is a formidable team in both bank and corporate treasury markets. For additional information, please visit Novantas.com 36

37 About Kyriba KYRIBA THE GLOBAL LEADER IN CLOUD TREASURY AND RISK MANAGEMENT SOLUTIONS Kyriba s suite of solutions gives finance leaders more insight at both operational and strategic levels, to position their organization for accelerated growth and maximum competitiveness. Kyriba delivers the full suite of treasury modules, from cash management to hedge accounting, and maintains the highest security standards. Our 100% Software-as-a- Service solution is categorized into five areas: 37