Perfecting the Cash Forecast: How to Add Business Value to Your Organization

Greg Person, Vice President, Pre-Sales

Bob Stark, Vice President, Strategy

September 29, 2015

Why Forecast?

Key questions to answer when forecasting

Path to success: Improving your forecast

Questions & Answers

Areas of discussion

Why Forecast?

Value of forecasting = making better decisions with cash

Investing idle pockets of cash

Invest for longer

Borrow more efficiently

Visibility into FX Exposures

Finance the value chain (supplier finance / customer finance)

Why Forecast?

Value of forecasting = avoiding scrutiny by shareholders

1) Shareholders want value from operating cash flow & cash balances• Shareholders can see your balance sheet and cash flow statement• Reinvest free cash flow against capital allocation strategy• “We’re cash rich” or “interest rate are low” no longer sufficient

2) Strength of USD• Hedging has never been talked about as much as right now

3) Value of overseas cash• Need to optimize use of foreign cash before tapping into ‘more valuable’

domestic balances

Why Forecast?

Key questions to optimize forecasting

Be efficient with your valuable resources

Cash flow forecasting involves significant input, time and effort from across the organization

Clearly determine the decisions the cash flow forecast information will facilitate and benefits this will bring to the company

1. What am I solving for?

Repeated mistakes lead to poor information and flawed business decisions

One certainty with any forecast is it will not be 100% accurate

Cash flow forecasting is an iterative process variance analysis and understanding the root causes responsible for forecast error is critical

2. Am I making the same forecasting mistakes?

Lack of insight to corporate strategy will increase probability of material variances

Corporate Treasury should not operate in corporate silo

New product lines, M&A strategies and expand internationally, it will greatly impact the future cash flow needs and performance of the organization

3. Do I understand my business?

Stop leaving money on the table and reduce interest expense

Increased interest expenses, opportunity risk, potential P&L impact

Optimize intercompany global cash liquidity

Internal cash is cheaper than external financing

4. Why fund your business with external funds?

Two teams using two strategies to find the same number

Indirect method: FP&A

Direct method: Treasury

Aligning methods allows treasury opportunity to contribute at board level

Alignment also directs mgmt focus on treasury initiatives – e.g. FX hedging

5. Direct or indirect?

Sleep peacefully at quarter-end

Real-time cash visibility and cash flow allocation automation creates certainty

“Will we hit our free cash flow target” is no longer a question; it is known

FCF targets are increasingly tied to executive compensation and public guidance provided to the investor community

6. Do have real-time insight?

Forecasting: Path to Success

Perfecting the Cash Forecast

Path to Success

a) Collaboration – involving the right people

b) Consolidation – incorporating the right data streams

c) Measurement – feedback loop to measure and report on forecast accuracy

Forecasting – Incorporate the right data

Sources to build the forecast

One-time entry

Import from internal systems (e.g. ERP)

Import from spreadsheets

Recurring cash flows

Extrapolation/Trending of historical data

Internal transactionso Target balancingo Payments

o Financial transactionso Invoice netting

One-Time Entry

Sometimes called “manual entry” We prefer to say semi-automated

All the benefits of Excel (type, tab, enter) plusaudit & controls of a workflow system

Importing Cash Flows

Importing cash flows doesn’t need to be an IT exerciseoSystem should take any format, any ‘structure’, and allow

configuration in the system by the useroWant to import detailed numbers or import sum totals

and spread across days

Recurring Cash Flows

Repetitive cash flows can be modeled for any frequency, with variability by day, week, montho Best used to create a placeholder - which is later replaced with

more updated forecast data from other sources

*Visibility*

Goal: Model and extrapolate forward historical cash flows

Steps:

1) Decide action and adjustments (e.g. average or trending of historic flows)

2) Select historic cash flows to extrapolate forward

3) Determine date/periods to project forward

Historical Data

Steps:

1) Decide action and adjustments (e.g. average or trending of historic flows)

Cash Forecast Generation

Steps:

2) Select historic cash flows to extrapolate forward

Steps:

3) Determine date/periods to project forward

*Visibility*Steps:1) Decide action and adjustments

(e.g. average or trending of historic flows)2) Select historic cash flows to extrapolate

forward3) Determine date/periods to project

forward

Reconciling the Forecast

Perfecting the Cash Forecast

Path to Success

1. Collaboration – involving the right people

2. Consolidation – incorporating the right data streams

3. Measurement – feedback loop to measure and report on forecast accuracy

Forecast Lifecycle - Reconciliation

*Visibility*

Important to capture in the database every stage of forecast (to later measure forecast accuracy)

Comparison of snapshots critical to measuring forecast accuracy (e.g. July 1 – Aug 31 as of Jul 1 vs. July 1 – Aug 31 bank actuals)

Forecast Accuracy – analyzing forecast variances

Require summary views with full drill down to cash flow details Important to have multiple comparisons

▪ e.g. Original budget plan vs. current forecast vs. hypothetical scenarios

Just like Excel – adding comments is a good reminder to yourself or notes to others analyzing forecasts

Ideally, comments available at both summary level and when drilling down to level of detail

Cash forecasting – final thoughts

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

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.

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

Treasury & Risk special report: A Clear View of Cash

Download at: http://www.kyriba.com/cash-forecasting-clear-view-cash-treasury-

risk-special-report

Additional Resources

Kyriba ebook: Six questions every treasurer should ask about their cash forecasting process - download at: http://www.kyriba.com/six-questions-every-treasurer-should-ask-about-their-cash-forecasting-process

Kyriba ebook: Perfecting the cash forecast - download at: http://www.kyriba.com/perfecting-cash-forecast-adding-business-value-organization

For more information

linkedin.com/company/kyriba-corporation

kyriba.com/blog

facebook.com/kyribacorp

twitter.com/kyribacorp

treasury@kyriba.com 1-855-KYRIBA-0

Perfecting the Cash Forecast: How to Add Business Value to Your Organization

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