Managing Corporate Currency Risk: Little Steps Make For Big Cash Flow Forecasting

Cash flow analysts deal with more variables than they ever have before – and, more often than not, do so with antiquated methods. In the following article, we will focus on discussing how a few small changes – namely around the automation of FX rate data and knowledge of local operations – can make a major difference for corporate treasury departments.

When it comes to the challenges facing the corporate treasury analysts tasked with forecasting cash flows, 2016 looks very similar to 2006, perhaps even 1996.

Decades after automation came into vogue, spreadsheets and manual processes for cash flow forecasting persist at many smaller corporations. A recent poll from McKinsey found that nearly half of the companies with less than $10 billion in revenue that they surveyed still use spreadsheets as their primary treasury management system.

Even those businesses that have modernized their systems are challenged.  Nearly half of the treasurers polled by McKinsey said that their cash forecasting is less than 80% accurate. These admissions are a bit startling when one considers how critical cash flow forecasting is to ensuring adequate liquidity and optimizing a corporation’s cash holdings, two of the CFO’s top priorities.

More recently, the challenge of accurate cash flow forecasting has been exacerbated by multi-currency market volatility and international expansion. FX fluctuations have pressed analysts to try to stay on top of their forecasts in near real time. The nuances of each new market – such as the time it takes for clients to pay invoices or the latest political tumult – enable disparate processes.

Admittedly, cash flows haven’t been the biggest of issues for corporate treasury teams in recent years, as low interest rates and an abundance of willing creditors have made borrowing favorable. Yet, the money spigot can’t last forever – and analysts can do plenty to help strengthen their FX best practices related to cash flow forecasting:

1)     Enhance communication with local subsidiaries – dialogue with business operations in each country can provide corporate treasury analysts with timely information on critical factors that can affect cash flow forecasting. As noted earlier, each country has a different way of doing business – knowing whether companies in a specific geography pay their invoices within 30, 45 or 60 days is essential. In addition, local staff can keep forecasters aware of whether local liquidity facilities are favorable.

2)     Utilize automated data inputs – as problematic as spreadsheets can be, some CFOs at smaller corporations can’t justify the expense of a fully automated system. Nonetheless, automated FX rate feeds can help ensure that the data that goes into spreadsheets is accurate. Automated FX rate feeds often cost a fraction of a full system – and in an extremely unpredictable multicurrency environment, they allow forecasters to focus energy elsewhere.

3)     Once again, scenarios, scenarios, scenarios – if a major market event were to happen today, corporations would still have easy access to cash – but that wouldn’t last long. Running liquidity and stress tests in economic peacetime – whether it be against political turnover in a key market, unexpected interest rate hikes or the failure of a supplier – will prepare forecasters for the next surprise event.

4)     Continuously monitor liquidity facilities – many treasurers admit to being unaware of the full breadth of bank accounts, cash reserves and credit lines their company has across the world. Up-to-date knowledge of the status and viability of these facilities can help forecasters not only access cash quicker in the event of a liquidity crunch, but also avoid excessive borrowing and tax costs.

It’s inevitable that cash flow forecasting technology will catch up to other corporate treasury operations in due course. That said, analysts can buttress their operations well before then by making pinpointed, strategic decisions on what to automate and by getting even more interconnected with local operations.