The time looks to be right for fine-tuning your company's cash flow forecasting processes.

At the Association for Financial Professionals (AFP) annual conference in San Diego in November 2004, Robert Baldoni, Partner and Practice Leader in Ernst & Young's Global Treasury Advisory Services unit, cited the following reasons for the growing focus on improving cash flow forecasting:

• In evaluating a company's prospects, Wall Street analysts are beginning to place as much emphasis on cash flow forecasts as earnings.
• Some companies have included cash flow forecasting as a material treasury process under Section 404 of the Sarbanes-Oxley Act. Thus, forecasting accuracy is more important than ever.
• With the credit environment being tight, there's a greater focus on a company's internal liquidity and being able to accurately discern what funds will be available in the future.
• Recent tax law changes on favorable repatriation conditions have required a better definition of core cash in foreign subsidiaries.

"This confluence of needs has cash flow forecasting pretty high on the radar screen for the CFO, the treasurer and Investor Relations," Baldoni told attendees.

Time to Start Forecasting?
When it comes to cash forecasting, some companies face a more fundamental question: Are there good enough reasons to initiate a cash forecasting program when no such program currently exists?

Consulting firm Treasury Strategies' 2004 Corporate Liquidity Survey indicates at least one very compelling reason: Cash forecasting pays.

Based on responses from 362 middle-market and large corporate treasury departments, the survey revealed that investors who forecast gain 30 basis points of added portfolio return over their industry peers who don't. Thus, a corporate investor with a $50 million portfolio could add $150,000 to annual returns by executing an effective cash forecasting program, the survey suggests.

"Most treasury professionals intuitively understand cash forecasting's value, but now there's empirical evidence that should encourage more corporations to reconsider forecasting as a means to improve investment yields," says David Robertson, a Treasury Strategies Partner.

The study found that only 50% of responding firms use formalized forecasting models or processes. The reasons why varied from the unreliability and irregularity of incoming data to costs, lack of time to devote to forecasting and not having a clean account structure with banks.

"Data is critical to effective cash forecasting," Robertson says, "and these information flows aren't always set up properly."

For example, if you look at a company that has both customer relationship management (CRM) and enterprise resource planning (ERP) systems, information may appear coordinated. But the reality is that each subsidiary/department may not report all its information, which would render forecasting inaccurate.

"The survey also reveals that some of what treasury does is undisciplined, particularly regarding performance reporting, risk analytics and compliance with policies," Robertson says.

Banks Can Help
Corporations can look to their financial services providers for help in improving cash forecasting and ensuring strong financial controls and processes.

"Banks can help companies set up appropriate account structures, deliver information and leverage their position as the settlement gatekeeper to help companies comply with policies and perform within the risk parameters of their portfolios," Robertson says.

He suggests that treasury managers document how the forecasting process works, list sources of incoming data/contacts and regularly communicate to colleagues the importance of forecasting on the company's bottom line.

Effective cash forecasting is particularly important in today's rising interest rate environment, Robertson says. "Having a more dynamic forecast will help corporates better understand and ensure their cash positions."

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