VIENNA, Austria
A new Visa-commissioned white paper titled, "Trends in Cash Flow Forecasting," outlines the current state of short-term cash flow forecasting, identifies and analyzes five major trends that are impacting cash flow forecasting, and provides four categories of best practices.
Corporate treasurers worldwide are now focusing attention on cash flow forecasting for two reasons, according to the paper. First, there has been an increase in the sophistication of forecasting processes due to recent improvements in information technology and advances in forecasting techniques. Second, the problems facing forecasters have grown more challenging as a result of increased exports and the heavier use of debt in financing.
The paper, released today at the annual EuroFinance International Cash and Treasury Management conference in Vienna, Austria, focuses on short-term forecasts that cover the next twelve months and are the main concern of corporate treasury departments.
"Forecasting is critical for companies of all sizes to minimize risk, maximize use of working capital and organize returns on investment: yet companies have found it difficult historically to develop accurate forecasting models because of the inability to acquire quality information," said Aliza Knox, senior vice president, Visa Commercial, Visa International. "Several of the cash flow forecasting trends favor electronic payments and payment cards because they provide direct access to easily categorized revenue and spending data."
The five key trends impacting cash flow forecasting are:
1. Improving technology is simplifying forecasting process: Firms are using better information systems to simplify and enhance the forecasting process.
-- Firms are coming to increasingly rely on treasury information systems (TIS) and to make less use of spreadsheets. TIS offer advantages because they maintain one central forecast, reduce error-prone manual data entry, enable greater security controls, provide a clear audit trail, and can easily include direct data feeds from other sources that can be used in preparing the forecast.
2. Forecasting function is centralizing: Forecasts are being produced more often by corporate headquarters rather than at the business-unit level.
-- TIS facilitate the transfer of information from business-units to headquarters. In centralized forecasting, a small number of employees at headquarters can focus all of their time on forecasting, likely enabling them to become experts in managing new techniques to generate superior forecasts in less time. In addition, centralization allows for uniformity across forecasts of different divisions.
3. Tougher regulations are driving better-informed forecasts:
Spillover effects of tighter regulatory controls are leading to more informed and data-driven forecasts.
-- Accurate forecasting can be a critical component of regulatory compliance, and securities regulations in some countries have directly increased the importance of the forecasting function.
4. New forecasting techniques becoming available: New techniques based on statistical and economic analyses are increasingly being adopted.
-- These techniques include: a) project-level forecasts that are more accurate than company-level forecasts; b) driver-based forecasting, which enables firms to evaluate the effects of economic environment changes; c) "Cash Flow at Risk," which permits firms to evaluate the risk that a disastrous event could lead to a cash shortage; d) incorporating forecasts into the investment maturity decision-making process to reduce banking transactions' costs; and e) cross-country credit analysis and international macroeconomic modeling to control export-generated cash flow volatility.
5. Private equity deals are increasing the need for accurate forecasts: The drive for better forecasting is strengthening, especially in firms purchased by private equity buyout investors.
-- Firms acquired by private equity buyout funds typically carry heavy debt loads. These firms need to produce especially accurate forecasts to comply with lending covenants and to avoid bankruptcy risk.
"The benefits created by good cash flow forecasting practices range from significant efficiency improvements at cash-rich firms to potential protection from insolvency at financially constrained enterprises," said Dr. Mark J. Garmaise, PHD, UCLA Anderson School of Management, author of the cash flow forecasting white paper. "The trends suggest that companies would be wise to incorporate the cash flow forecasting model more fully into their operational planning strategy to maintain a desired level of liquidity regardless of unforeseen activities."
Best Practices
The white paper describes four categories of best practice from analysis of the five cash flow forecasting trends, including:
1. Systems: Integrated firm-wide treasury information systems, such as third-party treasury workstations or enterprise resource planning treasury modules, are best. Spreadsheet-based forecasting is increasingly outdated.
2. Forecasting Techniques: Driver-based forecasting, using either simulations or regressions, is best, especially when combined with scenario or statistical analysis that provides a sense of the expected future cash flow as well as its range.
3. Payment Methods: Some form of electronic payment system, ideally one including integration with the accounts of customers and suppliers, is best. These payment methods can be incorporated into new forecast technologies. Electronic payment systems also provide data that is useful for information-intensive forecasting techniques.
4. Job Function: The attention of the treasury staff should be focused on an analysis of the determinants of cash flow variability, not on data collection. Improved technology automates the previously all-consuming task of assembling data, leaving forecasters with time for more careful study of cash flow dynamics.
Benefits of Electronic Payments Over Checks
According to the paper, several of the trends in cash flow forecasting favor the use of electronic payments and payment cards over checks. For example:
-- Improved technology and systems integration makes it more attractive to use both electronic payments and payment cards, because these methods of payment can be incorporated into firm-wide computing systems.
-- Centralization favors electronic payments and cards for receivables and payables, because of the direct access to information on future promised cash flows that is provided.
-- Tougher regulations favor electronic payments and cards, because they provide control over incoming funds, and allow companies to limit access to these funds to authorized parties. In addition, limiting corporate purchases to electronic payments and cards makes it easier for firms to monitor cash outflows and prevent unauthorized expenditures, because these payments are easier to document and provide an audit trail.
-- Advanced new forecasting techniques suggests use of electronic payments and cards, because they offer disaggregated revenue and spending data that can easily be categorized and studied.
Methodology
To analyze the current state of cash flow forecasting and developments that are likely to be important in the future, Visa commissioned Dr. Garmaise, an expert on corporate finance and banking, to identify and analyze more than 75 pieces of secondary research. Dr. Garmaise also conducted primary research interviews with six organizations of varying sizes across several industries worldwide to learn more about their current and future cash flow forecasting processes.
To view the entire cash flow forecasting white paper, visit
www.visa.com/cashflowforecasting.
Notes to Editors:
About Dr. Mark J. Garmaise, author of the cash flow forecasting study: Dr. Garmaise, an expert on corporate finance and banking, is currently Assistant Professor of Finance at the UCLA Anderson School of Management in Los Angeles, California, where he has been teaching for the past six years. Among his publications are "Informal Financial Networks: Theory and Evidence," (with Tobias Moskowitz), Review of Financial Studies, and "Confronting Information Asymmetries: Evidence from Real Estate Markets," (with Tobias Moskowitz), Review of Financial Studies. Dr. Garmaise was an Assistant Professor at the University of Chicago Graduate School of Business before joining the faculty at UCLA Anderson.
About Visa Commercial: Visa Commercial payment solutions - Visa Business, Visa Corporate and Visa Purchasing -- combine payment with information to create intelligent payment solutions that are designed to enable business and government organizations of any size and type to reduce costs, streamline operational and payment processes, and make more informed business decisions. Backed by Visa's unsurpassed acceptance, Visa Commercial products and services are designed to provide a complete way to manage payment-related processes, including travel and entertainment and procurement expenditures, payroll distribution, and information management. For more information, visit www.visa.com/visacommercial.
About Visa: Visa operates the world's largest retail electronic payments network providing processing services and payment product platforms. This includes consumer credit, debit, prepaid and commercial payments, which are offered under the Visa, Visa Electron, Interlink and PLUS brands. Visa enjoys unsurpassed acceptance around the world and Visa/PLUS is one of the world's largest global ATM networks, offering cash access in local currency in more than 170 countries. For more information, visit www.corporate.visa.com.
Source: Business Wire (Business Wire India)