A Crystal ball for cash flow forecasts.

The complex and sometimes arcane art of cash flow management used to be a relatively passive affair, as treasury departments were charged simply with managing and balancing the numbers. However, such departments are now becoming more active partners in creating value with the capital they track, and helping steer it into more efficient and profitable channels. One way in which this is achieved is through more active cash flow forecasting.

In order to assess current trends in cash flow forecasting, Thomson Financial conducted an anonymous online survey of 75 companies. Respondents encompassed a broad range of market capitalizations, sectors and complexity within treasury operations. The survey results provided a fascinating overview of the obstacles that prevent accurate cash flow forecasts at many companies, and how companies are addressing those obstacles.

At the highest level, the study confirmed that nearly all respondents produce cash flow forecasts, and within their firms, those forecasts are widely utilized and valued by senior management. A treasury workstation is the most common way that companies create their forecasts, with manually populated spreadsheets close behind.

But, how accurate are cash flow forecasts? In general, the longer the time frame covered in the forecast, the less satisfied financial professionals are with the accuracy. When asked about daily forecasts, 90 percent of respondents said they were satisfied with the level of accuracy; for yearly forecasts, satisfaction drops to 40 percent.

Further, when asked about the variance between actual and forecast daily cash flow, one fifth of financial professionals simply did not know the accuracy of their daily forecasts.

While these numbers may be surprising, it is encouraging to see that on the other side, 30 percent of respondents reported having less than 5 percent variance and a majority (56 percent) cited a daily variance of less than 10 percent, making this a reasonable benchmark for most treasury officers to target.

Bad Data Remains a Problem

So, what exactly prevents so many companies from achieving accurate cash flow forecasts? In a nutshell, bad data.

According to a large majority (80 percent), unreliable or irregular incoming data is the single greatest obstacle to accuracy. Many professionals simply are not happy with the information they receive from their business units. This may be since most reports are delivered to financial professionals verbally (45 percent of treasury respondents indicated that this is how they receive information from business units).

Among other ways of getting data, respondents said they use a standard form (40 percent), email, telephone, Voice Response Unit or some combination of these. Clearly, a streamlined data delivery system would greatly improve cash flow forecasting at many companies.

Besides the delivery of information from business information, "poor interdepartmental communication" was cited by 57 percent of respondents as a major impediment to accurate forecasts. Forty-four percent pointed to "lack of system integration," and 41 percent complained that "forecasting is not a priority in business units." Timeliness of the information was also cited as a major concern.

Happily, most treasurers are open to suggestions on how to improve cash flow forecasting, starting with better technologies and concentrating on timeliness and better information from business units. It seems that those who now use manual methods would be quite receptive to moving to workstations, since nearly 70 percent of respondents foresee using them in the future, with a huge dropoff in use of manual spreadsheets.

Checklist for Treasurers

Based on the results of the survey, it is clear that accurate cash forecasting is an ongoing challenge for treasuries. A few ideas for companies that want to improve in this area:

* Set a benchmark for forecast accuracy and measure it on a regular basis. Based on the survey, leading companies seem to have daily variances of less than 5 percent.

* Take advantage of technology, and use standardized forms integrated with treasury systems to pull more reliable and timely information from business units on an automated basis. This will improve the consolidation and analysis of cash flow information and extend visibility of cash flows over a longer time horizon.

* Invest time in building relationships and communication channels with business units and other groups in the cash forecast process.

Jacqueline Corbett ([e-mail]) is Vice President, Product Management, and Kara Newman ([e-mail]) is Vice President, Strategic Research, both with Thomson Financial Corporate Services. Among its workflow solutions for corporate professionals, Thomson provides treasury solutions such as Treasura and Thomson ONE-Treasury.