Cash Forecasting: Challenges, Modelling, and Visualization April 8, 2019 © 2019 Treasury Webinars . All Rights Reserved 1 About Treasury Webinars Treasury Webinars offers webinars designed to empower Treasury, Accounts Payable, and Accounts Receivable success at companies of all sizes, across all industries. We only do what we do best, webinars. © 2019 Treasury Webinars . All Rights Reserved 2 Learning Objectives • Separate cash forecasting myths from reality and define what a successful cash forecast looks like at your company. • Revise specific areas of your cash forecasting process to improve the quality of the short and long-term cash forecasts at your company. • Understand how forecasting done right improves strategic planning and delivers business agility for your company. © 2019 Treasury Webinars . All Rights Reserved 3 Our Agenda • Why Cash Forecasting Matters • Cash Forecasting Myths • Defining Your Cash Forecasting Process & Framework • Leveraging the Right Technology • Cash Forecasting Best Practices • Final Thoughts & Resources © 2019 Treasury Webinars . All Rights Reserved 4 Why Cash Forecasting Matters • Impacts borrowing and investment decisions • Impacts debt covenant compliance risk • Impacts working capital efficiency • Increase visibility into the sources and uses of cash along with the associated costs and benefits • Impacts financial agility • Impacts operational agility • Increased investor focus on cash balances and cash deployment efficiency © 2019 Treasury Webinars . All Rights Reserved 5 Why Cash Flow Forecasting Matters © 2019 Treasury Webinars . All Rights Reserved 6 Budget vs. Plan vs. Forecast •Budget- What you would like to happen •Plan- How you are going to make it happen •Forecast- What you think is going to happen © 2019 Treasury Webinars . All Rights Reserved 7 A Forecast is NOT a Target © 2019 Treasury Webinars . All Rights Reserved 8 A Reliable Forecast “Some would call ‘on course to hit a rock’ a bad forecast. Assuming it is true, it is a good forecast, even though it contains bad news.” - Bjarte Bogsnes, Implementing Beyond Budgeting © 2019 Treasury Webinars . All Rights Reserved 9 Cash Forecasting Myths • The benchmark of cash forecasting success is how close you get to 100% accuracy. • The more data the better in terms of cash forecasting success. • The more complicated the statistical method used in cash forecasting the better the cash forecast. • Technology is magic and is the key to an effective forecast. © 2019 Treasury Webinars . All Rights Reserved 10 Cash Forecasting: Setting the Stage • Identify the Type of Cash Forecast • Operational (1-30 Days) • Short-Term (Rolling 13 week forecast) • Medium Term (12 month rolling) • Long Term/Strategic (1-5 Years) • Define the Goals of the Forecast • Manage Short Term Borrowings • Tie to Balance Sheet Forecasting • Managing Capital Structure • Desired Level of Accuracy © 2019 Treasury Webinars . All Rights Reserved 11 Cash Forecasting: Setting the Stage Understanding Inflows and Outflows • Map your Cash Flows • Identify Inflow Sources • Identify Outflow Sources • Identify who within your company drives these cash flows • Identify all systems used to move and record fund movements © 2019 Treasury Webinars . All Rights Reserved 12 Cash Forecasting Framework Source: Cash Forecasting: A Free Cash Flow Perspective, 2017 AFP Annual Conference © 2019 Treasury Webinars . All Rights Reserved 13 Cash Forecasting: Methods Indirect Model • Top-down- derived from P&L and B/S forecasts, offers a macro view- look in the aggregate and then transpose down to business units, etc. • More suited for a medium or long term forecast horizon • Leveraged to drive strategy from a quarter to quarter time frame Direct Model • Bottom-up-a micro-view- look at segments by business unit, product lines within business units, cost centers. How low do you want to go? • Detailed projections of receipts and disbursements • Implementation requires more time and resources (people, data, systems) • Informs decisions/adjustments within a quarter (week, day) • Hybrid- a combination of top- down and bottom-up methods © 2019 Treasury Webinars . All Rights Reserved 14 Cash Forecasting: Direct Model Methodology • Time Horizon- generally up to 3 months by week or by day • Frequency- updated bi-weekly/weekly/daily • Methodology • Estimate the amounts and timing of cash inflows and outflows leveraging transactional data ( outstanding accounts receivable, outstanding accounts payable, and corresponding receipt/payment types and terms) • Predict cash flow drivers that can’t be forecasted effectively using transactional data using statistical analysis or trend analysis Source: Cash Forecasting: A Free Cash Flow Perspective, 2017 AFP Annual Conference © 2019 Treasury Webinars . All Rights Reserved 15 Cash Forecasting: Direct Model Drivers & Process • Drivers • Receipts/Collections • Tax Payments/Refunds • Disbursements /Spend • Financing/Investments/FX/Dividends • Intercompany settlements • Capital Expenditures • Payroll and Benefits Payments • Endogenous Factors (weather, FX rates) • Process Receipt & Payment Forecasts Consolidation Variance Analysis Learn & Improve Source: Cash Forecasting: A Free Cash Flow Perspective, 2017 AFP Annual Conference © 2019 Treasury Webinars . All Rights Reserved 16 Cash Forecasting: Direct Model Behavior & Organization • A Direct model often requires an accountability model that is based on key cash flow drivers in a decentralized cash flow forecasting environment. Cash Flow Forecasting Program Lead Customer Receipts Disbursments Treasury Payroll & Benefits Intercompany CapEx Tax Owners Director, Credit Director, AP Treasurer VP, HR Controller VP, FP&A Director, Tax Input Providers AR, Collections, AP Staff, Purchasing, Treasury Staff, Payroll, Benefits, Accounting, Operations, FP&A Tax, Accounting, Business Units Business Units AP, AR HR Staff Business Units Staff, Business Units Controller Source: Cash Forecasting: A Free Cash Flow Perspective, 2017 AFP Annual Conference © 2019 Treasury Webinars . All Rights Reserved 17 Cash Forecasting: Direct Model Data & Tools • Excel is still the most widely used tool, but the use of ERP Modules, TMS, and FP&A/BI/CPM tools are gaining popularity. • Transactional data such as open AR and AP items, and payments terms is often obtained from ERPs and/or data warehouses. • Data relative to endogenous variables that drive cash flow forecasting is received from sources such as a TMS, FX partners, banks, FP&A/BI/CPM solution partners. • Actuals are obtained from a general ledger, sub-ledger, online banking systems, a TMS, service providers and/or bank statements. Source: Cash Forecasting: A Free Cash Flow Perspective, 2017 AFP Annual Conference © 2019 Treasury Webinars . All Rights Reserved 18 Cash Forecasting: Direct Model Reporting & Metrics • Reporting- Rolling monthly forecast with weekly/daily/real-time views, Current month/quarter forecasts, Variance analysis (e.g., forecast vs. actuals, forecast vs. forecast, etc.), standardized reporting packages • Metrics- Accuracy (MAD, MADP, CFE, AFE), Timeliness of sub-forecast from stakeholders, KPIs related to key cash flow drivers Source: Cash Forecasting: A Free Cash Flow Perspective, 2017 AFP Annual Conference © 2019 Treasury Webinars . All Rights Reserved 19 Forecasting Accuracy • Financial Forecasting is more about variance management than the accuracy percentage. How do forecasts impact the quality of decisions? • If you know that every March your forecast has the possibility to produce a large variance either way due to certain seasonal events, plan for it! • Never stop trying to improve your model • Financial forecast improvement is about measuring both accuracy and volatility and then continuously working to improve your understanding of the key sources and causes of volatility. • Take action • Once you understand how and why your business forecast fluctuates, make changes based on that forecast. No decisions impacted, no value. • Forecast accuracy improves business agility. Source: Calculating Financial Forecast Accuracy - Improving Your and Your Company’s Forecast Performance © 2019 Treasury Webinars . All Rights Reserved 20 Forecasting Accuracy ROI • Utilize elasticity formula: • % change in X / % change in Y • For every 1% change in forecast, what would have been the change in profitability. • Make sure to measure both positive AND negative effects on an on-going basis. Source: Calculating Financial Forecast Accuracy - Improving Your and Your Company’s Forecast Performance © 2019 Treasury Webinars . All Rights Reserved 21 Cash Forecasting: The Right Method & Workflow • Clearly understand the current and intended purposes of your cash forecast. • Understand your data, it sources, and its relative accuracy. • Identify and understand the sources of variance within your current forecast and focus on the sources you can control. • In selecting a forecasting method do not try and fit a method or procedure to your needs and data. • Let your objectives and data drive your process NOT the technology or a statistical method of forecasting. • Identify professional colleagues who face your same challenges and engage them to identify the best practices for YOUR company. © 2019 Treasury Webinars . All Rights Reserved 22 POLLING QUESTION How would you characterize the level of collaboration between FP&A, accounts receivable and Cashtreasury Forecasting: at your company? A. Non-existent B. Minimal,Incorporating only as needed to resolveVisual issues Analysis C. Adequate, but