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How to improve your cash flow forecasting and working capital management

At the Association of Corporate Treasurers Annual Conference in Glasgow, on 14-16 May, CTMfile asked Bank of America Merrill Lynch's Dennis Sweeney, Treasury Solutions executive (ex-corporate treasurer at General Electric), and Matthew Davies, head of EMEA Strategic Solution Delivery, what they think are the 'low hanging fruits', their tips on cash flow forecasting and in working capital management.

Cash flow forecasting

In cash flow forecasting their tips were:
    •    the key is the ERP source data and forecasts: use effective tools to extract the basic payables and receivables payment data from across the company/group, and, if possible, adjust these A/R and A/P entries for each client by referring to past payment patterns, e.g. client A normally pays before the due date, while client B pays a couple of days late
    •    ensure that the departments in the local business units are involved in putting together the cash flow forecasts for their unit via a web-based solution
    •    use a treasury management system to bring all the cash flow forecast data together with the bank balances and treasury activity into an actionable position
    •    use scorecards to evaluate the accuracy of the business unit's forecasts and publish the results to create competition between the units to improve their forecast accuracy
    •    the bigger and more complex with many lines of business, the more difficult it is to forecast. It may be more effective to adopt a top down forecasting methodology.

Working capital efficiency

In working capital management their tips were:
    •    make working capital efficiency an integral part of how your company operates and give working capital efficiency objectives to every department no matter how small
    •    use increases in working capital efficiency to improve your credit rating
    •    accept that the basic liquidity flows in the company have a major impact on working capital efficiency, they need to be managed together
    •    accept that in many organisations working capital is not just the corporate treasurer's responsibility, it can be much more the financial controller's responsibility, e.g. inventory levels
    •    where appropriate, enable central treasury team, e.g. the in-house bank, to be the “global process owner” across finance teams to provide an enterprise view and programme
    •    manage working capital at the process level, measure and manage process cycle times – do not rely only on financial ratios  – such as  DPO, DSO, DIH – as they do not provide a cause and effect relationship
    •    in managing payables:

  1.     corporate treasurers have an important role to ensure that payments are paid on the target date for that payment – taking into considerations policy, terms and contracts
  2.     move from paper preferably via ACH or purchase cards
  3.     with smaller suppliers, consider putting large ticket items onto a purchase card to extend your DPO. Then negotiate (on a bilateral basis) how the merchant interchange fee rebate is allocated to create a win-win situation for both the buyer and the supplier. N.B. In some situations virtual cards are used to facilitate this type of arrangement.

Excellent tips from two very experienced cash and liquidity management experts.


This item appears in the following sections:
Cash Flow Forecasting
Inventory Cycle in WCM
Total Working Capital

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