Achieving Excellence in Cash Flow Forecasting Jeff Schaible Cindy Gerhard Baxter Citi Assistant Treasurer Liquidity Management Services Product Management Head Agenda • Citi Industry Research on Cash Flow Forecasting • Baxter Experience & Lessons Learned – Short Term US Cash Forecasting – Long Term Quarterly Forecasting – Long Term Global Strategic Forecasting Market Practices for Cash Flow Forecasting Citi® Treasury Diagnostics (CTD) • Proprietary benchmarking tool used by more than 350 clients of Citi – Benchmarks treasury practices in six areas, including cash flow forecasting, for insights into client’s current practices – Highlights strengths and weaknesses of treasury operations and risk management • Following slides are a summary of CTD results for cash flow forecasting Profile of CTD Benchmarks* Industry Annual Revenue 25% 23% 19% 19% 26% < $5bn 8% 7% 45% $5bn - $15bn 19% > $15bn Country Type % Revenue Outside Home Country 73% 0-24% 19% 32% 25-49% 21% 17% 50-74% 6% 32% 75-100% Developed Developing Advanced Developing n = 373 * Citi® Treasury Diagnostics, 2013. Treasury Function Profile* Scope of Treasury Responsibilities Does Treasury Have KPI’s? 65% Cash Operations 95% 28% Bank Relationship 95% Management Yes No Cash Forecasting & 89% Planning Number of Staff Shot Term Borrowing 87% Treasury Controls & 20% ≦10 74% Accounting 49% 11-30 31% >30 Risk Management 72% * Citi® Treasury Diagnostics, 2013. Cash Flow Forecasting Tools* Cash Flow Forecasting Process 60% 31% 2% n=374 Excel Spreadsheet complied from Automated TWS/ Completely multiple sources ERP Input + Manual Automated Companies that rely on Excel are more likely to be: • Headquartered in a developing market (esp. LATAM & APAC) • Local or regional footprint • Use a decentralized treasury model (89%) • Have not put in place an In-House-Bank • Do not run shared service centers * Citi® Treasury Diagnostics, 2013. Constructing the Forecast* Low rate of utilization for historical trends indicates an opportunity for many 84% companies to improve forecast quality 49% 43% 38% 38% Manual Input Collections Payables Statistical Automated Inputs Forecast Based Forecast Based Analysis of Past from TWS/ERP on Past on Past Patterns * Citi Treasury Diagnostics, 2013. Managing the Forecast Process* Forecast 24% 21% 35% 11% 7% Period Daily Weekly Monthly Quarterly Annually Forecast 23% 27% 34% 9% 2% Frequency n=350 Daily Weekly Monthly Quarterly < Quarterly Forecast 15% 19% 25% 38% Horizon Next Week Next Month Next Quarter Next Year * Citi Treasury Diagnostics, 2013. Evaluating Forecast Quality* How Often Do You Need to Reverse Positioning? Best in Class 22% 19% Room for 6% Improvement 14% 13% 17% 9% Daily Weekly Monthly Quarterly < Quarterly Never Don't Know * Citi® Treasury Diagnostics, 2013. Cash Forecasting at Baxter Baxter Profile • Global health care company with $14B in sales • About 60% of sales generated offshore • Complex legal structure, operating in more than 100 countries • Cash forecast is critical in the US as a result of shareholder obligations Baxter Background and History 2004 2005 • Current management team was installed • Cash forecasting not overly necessary – Legal structure allowed for cash flow into US – Dividend was small and paid annually – Share repurchases did not exist • By late 2005, legal structure changed – Cash flow into US was reduced – But, HIA offset the impact and allowed for repatriation Cash Flow Forecasting at Baxter 2005 2006 onward • Share repurchasing activity restarted • Dividend increased & changed to quarterly payout • US cash flows were lower • Debt financing and commercial paper became treasury tools True cash flow forecasts became essential for Treasury to perform optimally Day 1 - 45 Quarter 1 - 4 Year 1 - 5 Short Term Forecast Long Term Forecast Long Term Global 45 day look ahead By quarter for rolling Forecast 12 month period Strategic Financing Plans Short Term Forecast ST Forecast • History helps predict the future • Highly detailed sources/uses model • Excel based – Draws collections/ spending patterns by day from systems – Utilizes dividend/ repurchase forecasts by day – Evaluates capital spending and adjusts current year from previous – Evaluates year to year adjustments to business models • Control in place so that those who use it do not develop it • Look to be within 10% of the actual cash on any given day ST Forecasting Model ST Forecast Operating Cash Flows • Prior Year Inflows • Prior year Outflows • CP Position • Cash Repatriation Business Model Resulting Changes Excel Model Forecast • Intercompany Loans rd • Capital Spending • 3 Party • Share Repurchase Borrowings • Dividend Forecast Investing & Financing Cash Flows Forecast Output ST Forecast Beginning Net Cash Net Cash Netting, I/C, Ending Balances Inflows Outflows M&A Balance (7) US US Outflow (8) US Other- Beginning (1) US Op. (2) US Other - (3) Option (4) CP (5) Debt (6) Net Cash (9) Share (10) CP (11) Debt (12) Net Cash (13) Netting (14) I/C (15) I/C Net Daily Intra- Day Ending Date Operating CAPEX Operating (16) M & A Comments Balance Inflow Op. Inflow Inflow Issuance Issuance Repatriation Inflow Repurchase Maturity Repayments Dividends Outflow Flows Notes Op Cash Cash Adjustment Balance Outflow Adjustment Outflow 7/1/13 $3,041,000 $70,038 $182 $70,221 -$25,993 -$2,996 -$266,072 -$295,061 -$224,840 -$160 $2,816,000 (12) Dividend Payment 7/2/13 $2,816,000 $24,631 $470 $25,101 -$11,543 -$2,977 -$14,520 $10,581 $419 $2,827,000 7/3/13 $2,827,000 $25,462 $166 $25,628 -$15,197 -$6,355 -$2,508 -$24,059 $1,569 $431 $2,829,000 (8) Outgoing w ire 7/5/13 $2,829,000 $24,594 $1,349 $25,943 -$57,842 -$2,296 -$60,138 -$34,195 $195 $2,795,000 (7) Payroll 7/8/13 $2,795,000 $48,874 $113 $48,987 -$27,339 -$2,503 -$29,842 $19,145 -$1,145 $2,813,000 7/9/13 $2,813,000 $19,462 $1,619 $21,081 -$8,673 -$1,680 -$3,467 -$2,679 -$16,499 $4,583 $0 $2,817,583 (8) Outgoing wire 7/10/13 $2,817,583 $24,560 $1,619 $26,179 -$8,604 -$1,680 -$1,113 -$2,435 -$13,831 $12,348 $0 $2,829,931 (8) Outgoing w ire 7/11/13 $2,829,931 $16,966 $1,619 $18,585 -$14,539 -$1,680 -$1,288 -$1,987 -$19,494 -$909 $0 $2,829,022 (8) Outgoing w ire 401k 7/12/13 $2,829,022 $18,952 $1,619 $20,571 -$19,389 -$1,680 -$2,679 -$23,747 -$3,176 $0 $2,825,847 7/15/13 $2,825,847 $42,740 $1,619 $44,359 -$26,327 -$1,680 -$2,679 -$30,685 $13,675 $0 $2,839,521 7/16/13 $2,839,521 $24,713 $1,619 $26,332 -$10,761 -$1,680 -$2,679 -$15,119 $11,213 $0 $2,850,735 7/17/13 $2,850,735 $16,221 $1,619 $17,840 -$11,428 -$1,680 -$4,500 -$2,679 -$20,286 -$2,446 $0 $2,848,289 (8) Draw dow n on Loan 7/18/13 $2,848,289 $33,523 $4,765 $1,619 $39,907 -$28,659 -$1,680 -$2,679 -$33,017 $6,890 $0 $2,855,179 (2) FX Options • Adaptable to other time periods – However, going significantly beyond 45 days increases the volume of data and complexity to manage Next Steps ST Forecast • Continue to use the process for forecasting USD flows into Europe from subsidiaries • Roll out the same process to Europe – Integrate multiple currency, increasing complexity of forecasting and positioning US Longer Term Cash LT Quarterly Forecast Forecasts • Key objective of long term forecasting is to evaluate needs and generate detailed discussions with Senior Management on capital structure – Debt financing, commercial paper balances and cash repatriation actions • Baxter longer term cash forecasting process utilizes a sources/uses model but less detailed than the short term process – Generate a rolling 4 quarter timeline, prepared quarterly – Based on historical patterns of cash flows – Excel based – Target 20% accuracy for quarterly US flows LT Global Global Cash Forecast Forecast • Global cash forecast provides a longer term outlook of strategic financing and investing requirements. • Key objectives include: – Determining excess cash balances and repatriation planning – Implications of strategic plans on longer term lending and borrowing needs – Determining best long term use of cash – Developing strategies to invest cash most efficiently LT Global Global Cash Forecast Forecast • Less specific detail and generally only see ending bank account details – Intercompany and 3rd party cash flows are the focus – Specific inflows or outflows are not forecast • Uses a system called TreasuryVision to capture global flows on a daily basis and excel to analyze the data – System has been in place for about 1 year and the forecasting process is now being finalized • Target 30% accuracy – Expect this target to be lowered as more data is complied LT Global Global Cash Forecast Forecast • Baxter’s Treasury Vision model uses historical daily cash balances and an algorithm based on historical patterns Targeting to predict the cash in each country 30% – Incorporates a longer view P&L forecast accuracy vs. actual to predict future cash balances by country LT Forecasting Model LT Forecast Historical Cash Balances • Position for • Input from Treasury Vision System Cash investing • Cash Repatriation Baxter Long Range Resulting • Longer term Excel Model Forecast Plan plan for company capital • P&L Driven Models structure planning Conclusion • It is a long path, but the results have been valuable – Better use of commercial paper in the US – Less need to utilize 3rd party lines of credit – Smaller unwanted currency impacts on the P&L – Resulting in lower costs and more control There is still more work to do, but we see this as an on-going journey, not a final end point. Q&A • Jeff Schaible, Baxter • Cindy Gerhard, Citi IRS Circular 230 Disclosure: Citigroup Inc.