Smart forecasting in the spotlight
With Covid-19 shuttering workplaces and tanking economies, the core treasury skill of cash flow forecasting has been under intense scrutiny. Corporates have faced different industry-specific challenges in their forecasting, with different tools at their disposal to help manage this.
For Pearson, a global provider of educational content and digital services, Covid-19 lockdown meant that the majority of its testing centres were temporarily forced to close. This created a cash flow conundrum for the treasury, as customers that had paid for an upcoming test could choose to either reschedule or cancel and request a refund. Having recently implemented an machine learning-based cash forecasting tool that enabled it to cut borrowings by £100m, Pearson’s treasury turned to the tool for scenario planning.
“We ran a variety of scenarios around what the mix might be between refunds and reschedules” says James Kelly, Group Treasurer at Pearson. “The cash forecasting tools were really helpful in that regard. They gave us the ability to identify which revenue streams were affected and which weren’t, and we could track and monitor how they were flowing through. Within two weeks, we were able to identify which scenario we were in”.
Having a number of months of lockdown experiences from different countries, Pearson has created a model to inform cash flow expectations for any future lockdown events. The model considers that if people know a lockdown is going to be two weeks, they will generally behave as normal. If it is for a month, they start to cancel or reschedule reasonably early. A lockdown for longer than a month means people will wait until they have more clarity.
“We’ve got a better idea of how this all fits together, which is reflected in the model” says Kelly. “The key thing is that we’ve identified what works in the model and what doesn’t work. We continue to fine tune it, so that we can pull out exactly the drivers that we’re interested in at any time”.
Communication is key
The economic uncertainties have seen treasurers increasingly required to provide cash visibility data to executive management. At pan-African video entertainment group MultiChoice, group-wide cash forecasting processes have become even more robust.
“The main effect the crisis has had on our cash forecasting is the frequency and detail within the process” says Jan Beukes, MultiChoice Group Treasurer. “We’ve increased the amount of feedback sessions with executives, over and above our normal monthly reviews with business unit finance executives”.
The MultiChoice cash forecast recently received an upgrade, moving from an Excel-based process to a purpose-built cash forecasting tool in the SAP Business Planning and Consolidation (BPC) solution. This has freed up a lot of time for treasury.
“With any Excel model, it normally took a team member between two to three days to consolidate all the submissions, check formulas, and make sure that everything added up” says Beukes. “With SAP BPC, the submission template is standard for everybody across the business. Everybody needs to submit within agreed process timelines and then the tool auto consolidates all the forecasting data. The time the manual process took is completely removed”.
When MultiChoice set out to build the forecasting tool, Beukes was clear that it should not just be a nice to have, but that it should add value to the business. That meant focussing on the sources of cash flow data within the business, to avoid a ‘garbage in, garbage out’ scenario.
“That was a key driver for us at the start” says Beukes. “It’s important to remember that it doesn’t matter how fancy a forecasting tool is or what reports it can push out, if the discipline around forecasting and how it all flows into the bigger picture is not understood by business, you’re not going to get what you’re looking for. If you get that right, you can then look at more intuitive data models to improve scenario analysis while lowering human intervention”.
Spreadsheets still doing a job
Not all companies use the latest technologies to support cash forecasting. This is the case at real estate firm Prologis. Real estate is fairly traditional business, where the recurring business – a regular pattern of rents coming in either monthly or quarterly – is relatively easy to forecast.
“At a treasury level, we are split into regions and all the regions operate independently and build their own Excel forecasting” says Han Hoestra, Director of Treasury Europe at Prologis. “We all have the same goal, a timely pure view of the cash positions and balances, and the ability to filter in per currency or per part of the business or country. That’s all built in.”
During the Covid-19 crisis, Hoestra noticed the rise in importance of cash forecasting and the quality of forecasting data at Prologis.
“Cash forecasting has become much more important” he says. “We are providing more data as a response to increased requests from our business partners. We never before had to question our team in the field about whether rents were actually coming in but, since Covid, people started asking if we could monitor this. We have built it into the forecast and are sharing this more, as well as thinking of possible scenarios”.
While the recurring business is relatively straightforward, the Prologis treasury is always adjusting its portfolios and has found limitations in Excel when it comes to scenario analysis. As a result, the company is keeping an eye on the solutions market to see if there is a forecasting tool to match the requirements of each regional treasury.
“A forecasting tool should be able to interface with different sources of information” says Hoestra. “With Excel, it is not linked or interfacing with other systems and we have to dig into different sources of information and be able to know what information can be copied and what’s useless”.
The Covid-19 crisis has given treasurers of every industry a renewed focus on cash forecasting processes and tools.
“Forecasting is a living organism” concludes MultiChoice’s Beukes. “You’ll never get to a position where you are completely happy and satisfied with everything, but keep focussed on doing the basics well”.