Citi’s joint presentation at the AFP Conference in Las Vegas in November 2013 with $14bn sales/annum Baxter Healthcare Corporation, on ‘Achieving excellence in cash flow forecasting’ was a standing room only session. Their talk was packed with information and examples of current practices, and how to overcome the issues and problems in cash flow forecasting. Cindy Gerhard - Product Management Head of Liquidity Management Services - presented background on current practices and then Jeff Schaible - Assistant Treasurer, Baxter - described their current cash flow forecasting methodologies and development plans.

Current practices and best practices
Cindy Gerhard presented some research results from Citi’s Treasury Diagnostics proprietary benchmarking tool, which is used by more than 350 clients. They found that 60% used Excel spreadsheets compiled from multiple sources, 31% used automated TWS (Treasury Work Station) or ERP systems combined with manual input, and only 2% had completely automated cash flow forecasting systems.

The research on constructing forecasts showed that well under 50% of the respondents based their cash flow forecasts on historical trends which, Citi believes, shows an opportunity to improve forecast quality. The review of the forecast periods, frequency and horizon showed that there are a range of different approaches used by Citi’s clients:

Source & Copyright©2013 - Citi Treasury Diagnostic

The research showed that even in the Best in Class forecasting systems some 20% of the forecasts under three months have to be reworked.

Cash forecasting at Baxter
Over the last decade Baxter treasury found that effective cash flow forecasting became essential for corporate treasury to perform optimally. They currently use three different forecasts:

• short term: 45-day look ahead
• long term forecast: by quarter for rolling 12-month period
• long term global forecast: strategic financing plans.

Short Term Forecast:
Baxter’s short-term forecasting system is Excel based which uses previous patterns of income and expenditure as input to the forecast because Schaible believes that “History helps predict the future.” They extract collections and spending patterns each day from systems in the company. It also includes dividend and repurchase forecasts by day, and evaluates capital spending with adjustments for the current year from previous periods. They have put in place controls so that those who use the forecasts do not develop the cash flow forecasting model, shown below:

Source & Copyright©2013 - Baxter Healthcare Corporation

Baxter aims to be within 10% of the actual cash on any given day. Schaible chose a 45 day period because he wanted a detailed understanding of the cash flows in more just one month but beyond 45 days the volume of data and complexity became too difficult to manage.

In the next 12 months, Baxter will continue to use the process for forecasting USD flows into Europe from subsidiaries. They also plan to roll out the same process to Europe, and integrate multiple currencies, which will increase the complexity of the forecasting and positioning.

US longer-term forecasts
Key objective of the US long term forecasting is to evaluate needs and generate detailed discussions with senior management on capital structure, debt financing, commercial paper balances and cash repatriation actions. In Baxter, the longer term cash forecasting process uses an Excel model which is less detailed than the short term model. The model generates a rolling 4 quarter timeline, prepared quarterly based on historical patterns of cash flow. The target is to achieve 80% accuracy for quarterly US flows.

Global Cash Forecast
Global cash forecast provides a longer-term outlook of their strategic financing and investing requirements. Key objectives include:

• determining excess cash balances and repatriation planning

• understanding the implications of strategic plans on longer-term lending and borrowing needs

• determining best long-term use of cash

• developing strategies to invest cash most efficiently.

Such a long-term forecast requires less precise detail. Generally Baxter only uses ending bank account details to understand the inter-company and 3rd party cash flows. Specific inflows or outflows are not forecast.

Baxter uses Citi’s TreasuryVision service to capture global flows on a daily basis and Excel to analyze the data:

Source & Copyright©2013 - Baxter Healthcare Corporation

The system has been in operation for about a year, and the forecasting process is now being finalized. There is a target to achieve 70% accuracy, although Baxter expects this target to be increased as more data is compiled.

Jeff Schaible’s overall conclusions were that their investment in developing the three forecasting systems have been valuable and as a result Baxter have made better use of commercial paper in the US, there has been less need to utilize 3rd party lines of credit, and they have had smaller unwanted currency impacts on the P&L which has resulted in lower costs and more control. He finished by saying. “There is still more work to do, but we see this as an on-going journey, not a final end point.”

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Absolutely, cash flow forecasting is an on-going journey and never has an end point, there are always improvements that can be made to any cash flow forecasting model or system. Baxter’s approach to cash flow forecasting is important because it, 1) brings together the short-term forecast with the longer term, and then links these two forecasts with the global long range business cash forecast, and 2) they use different accuracy targets for each type of forecast. Impressive.