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Cash-Flow Forecasting remains KING

“If you have to forecast, forecast often” (Edgar R. Fieldler)

Need for reliable forecasts

Nobody could deny the importance of having accurate and reliable Cash-Flow Forecasts (CFF). Often, we heard “cash is king”. However, knowing if you will get cash and how much is even more important. Treasury management is “anticipation”. Managing cash is easier than forecasting cash. More than ever, it is essential to be able to anticipate your need for funds (or to estimate any surplus) to ensure appropriate facilities are put in place to match. The premium price of credit and its relative scarcity make it imperative to determine actual future requirements better. Many firms are trying to produce better quality cash flow forecasts. However, very few multinationals are succeeding in this. So, what are the keys to good forecasting?

The cost of credit has risen very sharply over the last few months given COVID and ratings deterioration. Credit has become a scarce commodity and, like all luxury products, is available only to the most financially sound groups. Today, not being of "investment grade" quality is an enormous handicap in the bank lending market. The bond market would appear to compensate for this lack, as do stock-market issues, although these are on the decline or still at an exceptionally low level, after a financial earthquake unique in the history of modern finance. Since credit is ever scarcer and ever more expensive (despite negative and floored or low interest rates), even where credit lines are not utilised, it is vital to ensure that they are appropriate in scale and to ensure that surplus capacity is not committed to simply on the grounds of prudence. By arranging facilities that exactly match their bank lending needs with a minimum of financial cushioning, firms will reduce their financing costs and their costs of arranging lines of credit ("commitment fees"). They need to be kept in check to reduce unnecessary costs. However, to keep their credit facilities to the minimum necessary plus a small safety margin, they need accurate cash flow forecasts.

Forecasting for better management

Managing is forecasting. And to forecast, internal discipline must be inculcated right down to subsidiary level (i.e. Profit Centre/Business Unit). Unfortunately, invoices do not get paid in profit, but in cash. This explains why the treasury manager, “the custodian of cash”, has become a centre of attention and why Cash Flow Forecasts (CFF) have become so essential. Many have tried it, but few have succeeded in practice. For many, CFFs are simply a sort of budget revision exercise. Others make do with cash flow statements reporting the situation after the event. However, CFF’s ought to be consolidated (in IFRS format) at least quarterly, with a monthly review, with forecasts going forward to at least the end of the current financial year and with a subsequent review to explain the variances and to instil forecasting discipline. But how many firms can produce forecasts worthy of the name? If your forecasts are reliable, you can even test them using stress test scenarios. Effort put into forecasting is not incompatible with robust action on working capital requirement ("Working Capital Need"). By working on accounts receivable, accounts payable and stock, you can improve the reliability of cash flow forecasts. Everyone is hunting for cash and tries to pool cash centrally to optimise the net cash position and their financing costs. This cash is the oxygen, or the fuel needed for the firm's survival.

Thinking along similar lines, it is important to measure the "Cash Conversion Ratio" (OCC = FCF/EBITA as a %) or the capacity to convert operating profit before tax and depreciation into "Free Cash-Flow" (FCF). This is the measure of performance and the capacity to keep generating cash.

Rules to be followed for good forecasting


Generally, the thing that is most often missing is discipline within an international group. Discipline and rigour for producing quality forecasts. Similarly, the scope of coverage (which ideally should be complete full consolidation) is often partial. The level at which forecasts are prepared (sub-consolidation/Business Unit – BU level or operating subsidiary level/Reporting Unit - RU). It is obvious that the level of granularity and inputting data in the finest detail will improve the reliability of data and the completeness of the consolidated figures. Therefore, it is important to bear in mind the consolidation scope and forecasts of future flows. The use of identical definitions and similar software applications also aids data accuracy.


Choosing software is a tricky business. Obviously, everyone has their own ways of doing it. Nevertheless, we think that using a single consolidation and reporting application for preparing future cash position and cash flow reports is a real advantage. With monthly balance sheets and income statements, it is possible to mix the direct (based on in/out flows) and indirect methods (based on balance sheet movements), giving more information and means of explaining variances. This is because the difficulty is often giving explanations after the event of the variations observed. Information on working capital is also essential and must be forecast and monitored quarterly.

We should however note that many multinational group BU’s/RU’s use Excel spreadsheets for their local forecasts and for preparing partial balance sheets and income statements. These two factors then make it possible to mix direct and indirect methods.


Subsidiaries must be required to explain divergences from forecast (actual against forecast + forecast against re-forecast). Requiring explanations inevitably imposes discipline and gives the exercise greater accuracy and value. The narrative portions of the CFF report are also important.


Of the many potential problems and critical points, inter-company returns are important (they can be symmetrical or non-symmetrical, as defined in advance). They must allow for offsetting and clearing of balances to give a consolidated picture. It is necessary to distinguish inter-company transactions external to the BU from ones internal to it. Input should therefore ideally take place at the lowest subsidiary level possible, thereby ensuring that the information is as relevant and as reliable as possible (i.e. the RU level). Similarly, the VAT aspect can also give rise to misunderstandings and must be clearly defined. The concept of "accessible" cash is also crucial. At the end of the day, it is only the cash pooled at head office level, and therefore "accessible", that can be taken into consideration and is worthwhile forecasting. For several reasons (JVs, minority interests, "idle cash ", etc.), not all cash can be reported to central treasury.

Head office (or local) adjustments, also called "lifting" may also modify overall profit for several reasons. The consolidation percentage should be included, but sometimes a subsidiary consolidated at equity can report funds to the central pool (although the opposite is most often found). Therefore, consolidation software, if perfectly in line with the application for reporting both the cash position and cash flows, will provide consistency and facilitate the exercise. The consolidation scope must be as consistent as possible over the various budgeting, forecasting, and accounting periods, to provide consistency and comparability. If possible, the same definitions should be used at the financial accounting, consolidation, and treasury level as at the internal reporting level. These common definitions will generate KPIs (Key Performance Indicators). Otherwise, they will not be speaking the same language. What is the "cash" concept? "Free cash flow" or rather the "cash conversion factor"?

The methods chosen (direct or indirect) are not of great importance, provided they produce a reliable result. However, the direct method, the one most appropriate to cash, would appear to be the best. In the interests of greater consistency, foreign exchange (FX) should be treated as it would be for budget or consolidation purposes. The interfaces between the IT applications used will be crucial for providing as many links and similarities as possible between the reports and the software applications. If a local software application is used to prepare monthly forecast balance sheets which themselves give forecasts of future cash flows, (indirect method), the interface will be more than just useful. Eventually, explanation and narratives must be included in the CFF reports in order to give an understanding at central level of the assumptions used and for checking that they are consistent.

Better cash-flow forecasts mean cost saving

Reliable forecasts of future cash flows are still a tricky exercise and a cliff to be scaled. This steep slope must however not prevent the treasury manager working on qualitative improvements and greater completeness of CFFs. You need to invest money to save money. However, it is not just a question of putting in an IT system. Forecasting is a subtle art, needing consummate technique and it has a long, almost continuous, learning curve. Rigour must be inculcated. This rigour will come with practice and by monitoring forecasts with a qualitative review after the event. That is the price of quality. The ability to convert operating profit (EBITA) into Free Cash-Flow is essential for survival in an economic world which has in parts become somewhat savage and cruel (Cash Conversion = Operating Free Cash Flow/EBITA = xx% per BU/per RU). To accurately forecast a firm's financial position and future net borrowings, the CFF requires real discipline right through to subsidiary level. We cannot afford to skimp on that these days. Nevertheless, there are good news. Technology is available and solutions exist, like CashLab, for example or some other Fintech’s solutions. They help to accurately set up cash-flow forecasts. Treasurers can adopt solutions easy to implement, robust, customizable, efficient, and not too expensive. Tell me which CFO could refuse implementing such a solution after the COVID-19 crisis? If you don’t have yet cash-flow forecasting solution in place, it is time to consider implementing one.

François Masquelier, SimplyTREASURY

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