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Cash flow forecasting can seem to be a bit of a waste of time, or essential

At the Cash Flow Forecasting session at the Association of Corporate Treasurers Cash Management conference last month, John Holmes, ex-corporate treasurer of several European MNCs, described how he has learnt that in cash flow forecasting the importance of the cash flow forecast and the level of detail required depend on the nature of the business and company culture. In some companies, it can seem to be a bit of a waste of time because the corporate treasurer is able to form a clear mental picture of what key numbers will be, while in others, it is not easy to have this mental picture, so cash flow forecasting is critical. 

There are considerable variations between companies, for example, in:

  • an FMCG company which had, say £100m average borrowings with a peak deposit of £40m and a peak borrowing of £200m, the cash flow was quite unpredictable. This was because most of the cash volatility was caused by huge duty payments, which meant a daily ‘rest’ forecast (forecast balance position out to 18 months) was essential (at least for the key dates) which gave a picture of highs and lows and enabled treasurer to see when there might be an opportunity to borrow for several weeks or months rather than overnight. Two key variables in the cash flow could change the forecast considerably: the sales forecast which was updated each quarter, and the stock build forecasts. In this type of business, it was very difficult to form useful a “mental picture” of the cash flows, and so cash flow forecasting was critical.
  • a highly centralised UK manufacturing group, with significant debt, had to use several different techniques to manage their cash and the reported borrowings. A special committee prioritised certain cash raising transactions or asset sales, and payment delays. The overall result was accurate year-end forecasts.
  • a building products company, with a non Anglo-Saxon strongly decentralised management culture and a very seasonal business - a summer peak and year-end low point, cash flow forecasting was particularly difficult. The problem was that, despite a business model that was not very volatile, the longer-term forecasts made at the mid-year were often obviously inaccurate. This was difficult to tackle in a decentralized culture.  After careful review and suitable overlay adjustments from the Treasury and the CFO, the company was able to use its cash forecasts to great effect in fund raising, its private company status allowing it to build strong bank relationships through giving extra information and generating a track record.

John’s general conclusions on cash flow forecasting are that:

  • the importance of the cash flow forecast and the level of detail required depend on the nature of the business and company culture
  • any forecast needs to be reviewed against known patterns and influences - seasonality, capex requirements - for ‘reasonableness’ in corporate treasury’s view
  • cash flow forecasting modelling needs to use data from a wide variety of sources to be effective.

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