Cash Flow Forecasting in Uncertain Times

An EACT survey conducted in March 2020 illustrated that for over half - 55% - of treasurers, cash flow forecasting will be their top priority over the next 12-24 months. This is not a new phenomenon spurred by the COVID-19 crisis: the same finding was apparent in the two most recent PwC global treasury surveys in 2017 and 2019. At a time of crisis, however, senior management focus on cash flow forecasts has never been more acute.

A Crucial Element of Decision-Making

The crisis is having immediate and highly unpredictable impact on cash flow, across industries that are seeing an explosion in demand, and those that are seeing their business implode. Supply chains are being heavily affected, as the availability of manufacturing inputs reduces, while cost increases. This also weighs on working capital, with suppliers demanding payment upfront, while customers are paying later.

“Many treasurers struggled with poor quality forecasts before the COVID-19 crisis, but the forecasting process has become even more complex. Corporations that were cash rich a month ago now find they need to increase short term liquidity, with a backlog of orders resulting in no incoming customer payments. Even when treasurers have been able to forecast quite effectively in the past, previous assumptions are no longer valid.” — Didier Vandenhaute, Partner, PwC

If current forecasts are so wildly inaccurate, is cash flow forecasting worth doing? The answer is decisively ‘yes’. A projection of future cash flow, including how P&L, liquidity and working capital will be affected under different scenarios, is no longer a treasury exercise alone, but an essential senior management tool to support strategic decision-making.

“The need for effective cash flow forecasting is closely linked to working capital optimization. During any crisis, including the current COVID-19 situation, ‘cash is king’ becomes the mantra, and senior management needs a clear view of cash flow forecasts and potential scenarios to drive key decisions.” — Steven Lenaerts, Head of Product Management, Global Channels, BNP Paribas

Treasurers therefore need to take a pragmatic approach to reviewing their cash flow forecasts to reflect the new cash flow dynamics in their business, and also take measures to create a liquidity buffer, e.g.

  • Identifying and mobilise sources of short-term liquidity wherever possible, whether drawing down on bank facilities or accessing alternative sources, as the previous article in this series discussed. Most companies will also be looking at their costs and identifying non-essential expenditure that can be postponed.
  • While cash flow forecasting models may not reflect the current extreme volatility and unpredictability, it is important to build up a picture of where blind spots are and how these could be addressed.

Starting from Scratch

While most treasurers will be revisiting and potentially revising their cash flow forecasting approach to reflect new data, the treasurers that face the greatest challenge are those that do not have cash flow forecasts in place at all. In these situations, the initial focus should therefore on mobilizing data that is accessible now, before looking at a more robust and permanent solution for the future.

“An 80:20 rule will typically apply in these situations: start with the ‘big ticket’ items i.e. the five or six flow types that contribute the most to the business, rather than trying to gain visibility of 100% of flows. Once you have this, you can then look at potential sources of cash, such as liquidity buffers, critical vs. non-critical payments, and focusing on collections” — Hans Candries, Partner, PwC

A Pragmatic Technology Strategy

When building a cash flow forecast, just as with any other financial activity, it is best to use system tools, such as the treasury management system (TMS), enterprise resource planning (ERP) platform or a specialist tool. Realistically, however, there is unlikely to be time to acquire, implement and integrate new solutions given the immediate demand for forecast information.

“Although sub-optimal, you can use spreadsheets to bring together bank data and information from internal counterparties. When approaching subsidiaries and central departments for forecast data, it is important that they understand exactly what you are asking for, and why, ideally with the support of senior management to emphasise the urgency. The initial focus should be on a short-term cash flow forecast, rather than attempting a 12 month rolling cash flow forecasts that you might look at as a second stage.” — Francois Masquelier, EACT

Having responded to the urgent need for data, however, it is important to build a more robust process for the future. There are many approaches to doing this, including the use of artificial intelligence (AI) tools for cash flow forecasting, which has been a growing trend in recent years. As the most recent JTT report illustrates, some companies, such as Microsoft, have found that an AI-based approach is more accurate under normal circumstances. In the current crisis, however, it may take time for AI tools to ‘learn’ new cash flow dynamics, so treasurers may need to supplement these tools with more traditional methods.

Even so, technology in itself, however sophisticated will not create a more accurate cash flow forecast, it is the quality of data on which it is based, and the behaviour of group companies that will make the difference.

“A cash culture across the business is essential. Everyone, everyday should be thinking about how to protect every euro. Business units cannot think of cash pools as a limitless source of cash, and must also be realistic and prudent in the forecast reporting they submit to treasury. While expenditure is relatively controllable, however, collections are more uncertain, which will affect forecasting accuracy unless techniques are in place to increase predictability of flows.” — Francois Masquelier, EACT

Creating and reinforcing this cash culture with senior management and across the business is a vital way in which treasurers can support their organisations at a time of change and uncertainty.

Top Tips

“A forecasting mentality should be based on “look, learn, prepare”. If you can’t do the first of these, it is impossible to do the second and third.”
— Steven Lenaerts, BNP Paribas

“Simplify and then automate treasury activities as far as possible to make cash flow data more reliable and timely.” — Francois Masquelier, EACT

“Ensure that CFO support for cash flow forecasting is communicated across the business to raise the priority and ensure better quality data.” — Hans Candries, PwC

“Gain CFO commitment now for a more permanent solution to build or refresh cash flow forecasting capability once the initial stages of the crisis have passed.” — Francois Masquelier, EACT

2020 is the fifth anniversary year of the Journeys to Treasury partnership, comprising BNP Paribas, European Association of Corporate Treasurers (EACT), SAP and PwC. We are marking this special alliance with a ‘Journeys to Treasury Bitesize’ series, providing topical insights and support for treasurers as they navigate this challenging period.


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