The interconnectivity between banks and their corporate clients has resulted in corporations feeling the downstream effects of regulation in the banking sector, most specifically Basel III's Liquidity Coverage Ratio (LCR). The new LCR has created a paradigm shift in the value of client deposits, with different treatment applied across client types (e.g., corporations vs. financial institutions) and balance types (e.g., operating vs. non-operating).

As a result, companies are demanding better visibility and accurate cash forecasting tools to mobilize surplus cash in order to avoid potential bank charges on idle "non-operating" balances or balances held in currencies or jurisdictions facing negative interest rate environments (e.g., euros and Swiss francs).

The benefits of solid forecasting

By mastering the art of cash forecasting, a company positions itself to have access to liquidity at the right time and right place — to fulfill payment obligations, enable self-funding within the organization, manage counterparty exposures, and/or seize investment opportunities in pursuit of additional yield.

Strong and well-disciplined forecasting not only provides accurate and timely information, but it also delivers actionable data points to facilitate decision-making within the treasury organization:

• If the cash forecast predicts excess cash, the company could seek a higher-yielding investment option to optimize the return on balances that would otherwise sit idle on a regular operating account.
• If the cash forecast predicts a cash deficiency, the company could liquidate investments or proactively seek a more cost-efficient funding source.
• If the cash forecast predicts a mix of excess cash and overdraft positions in certain accounts, legal entities, and/or regions, the company could initiate an intercompany transfer to self-fund cash shortfalls in the specific account, legal entity, and/or region. This can ensure that the cash stays within the group and no borrowing fees are paid to external parties.
• If the cash forecast predicts a deficiency in one currency while another currency has an excess, the company could initiate a foreign exchange hedge to avoid the overdraft charge.

To act on any cash forecast, companies should be aware of tax and/or legal regulations that may restrict or limit the uses of such strategies in certain countries.

Challenges and best practices

At a time when bank systems and technology platforms are integral to the day-to-day management of treasury functions, there is still a heavy reliance on spreadsheets.

Although it can be the most cost-effective approach, a spreadsheet solution is more time intensive and has a higher risk of manual entry errors or mistakes when consolidating information from different data sources. For corporations that depend completely on spreadsheets, an additional challenge is convincing business units of the importance of timely and accurate data for the cash forecast.

While spreadsheets are tried-and-true, there are challenges in data consolidation — from the choice of data to include in a forecast to the maintenance and expansion of the forecast with actual data — which can also be perplexing for any regional or central treasurer.

Even corporations with automated cash forecasting systems experience some of these issues. They receive automated data feeds from internal and external providers and still depend on spreadsheets provided by business areas and entities that are not connected to the forecasting system, or have data items that reside outside of these systems.

Whether you use spreadsheets, or a more automated method to forecast cash, you still face many challenges. To address some of these challenges, here are a few best practices to implement:

• Outline your business objectives and communicate the value-add proposition of an automated and enhanced forecasting process.
• Highlight to the respective business units the potential cost and/or missed opportunity of providing insufficient information.
• Identify quality data sources and points of replication across the enterprise — e.g., common technology layers and file formats — that will simplify data gathering and integration.
• Take one step at a time, implement a new cash forecasting process on a small scale and demonstrate success with this process before implementing it widely across a business unit, entity or region.

Evaluating the right approach and tools

There is no "one-size-fits-all" approach to cash forecasting. Each company needs to evaluate the cost, complexity and objectives of its forecasting exercise.

While often perceived as a trivial task, the collection and integration of forecasting data brings many of the same challenges for companies of all sizes, including dealing with different operating systems, users in multiple time zones and resource constraints. Many companies still tackle these challenges with a planning and forecasting approach that features the use of simple spreadsheets. If they want to explore automated forecasting alternatives, they should consider several factors:

• The impact of "disrupting" an established business workflow, in pursuit of a more automated and efficient process
• The complexity of integrating data across bank providers and in-house systems
• The ability and practicality of deploying an automated alternative in multiple locations or regional hubs
• The cost, resources, and time required to implement and maintain automated forecasting across the organization

At some point, as a company grows and adds business units in new countries and regions, it will inevitably need to seek a more automated approach to cash forecasting. These companies typically have cash forecasting capabilities within their Treasury Management Systems (TMS) or Enterprise Resource Planning (ERP) systems to support the growing complexity of their business operations.

These platforms provide corporations additional options to create cash forecasts that are more sophisticated and increasingly dependable, incorporating new regulations, counterparty limits and variables normally managed by an intricate spreadsheet. If you are looking for supplementary treasury management tools, below are some to consider for your upgrade:

• Risk management software to monitor and report counterparty exposures to management, regulators, auditors and other stakeholders.
• Visibility and execution features to evaluate investment opportunities and actively place cash into various investment vehicles
• Hedging and trading tools to manage FX exposures from a centralized source within the treasury organization.

Complementary solutions

Fine-tuning your cash forecasting makes great sense in light of recent macroeconomic and regulatory developments, but to be an effective treasurer, you should also consider some additional automated tools that banks offer to complement forecasting:

Cash pooling. Local, regional or global cash pool structures automatically move excess funds into a master account. Overdraft positions can be automatically offset with funds provided from the master account. The automated transfer of positive balances and offset of negative balances also reduces the need for external funding as intercompany balances, where permissible, are used to self-fund overdrafts.

FX hedging. Physical cash pooling is mostly offered for single currency structures. Banks also offer multicurrency cash pool structures that will convert regional currencies into a base currency. This can further ease the daily tasks of a treasurer, as a required FX transaction would be initiated automatically.

Investment sweeps. In addition to automated cash pooling and possible FX conversions, companies can set up investment sweeps that automatically invest excess funds into mutual funds or another bank deposit solution to ensure excess funds generate an overnight return.

Investment portals. For treasurers who want to self-initiate FX deals and investment transactions, investment portals provide a variety of investment vehicle options through multiple investment providers. In addition, analytics tools that come with these portals allow companies to assess the overall risk exposure to the investment portfolio and to re-balance if necessary.

Not the same old story

You may be thinking, "I've heard this story before — I know I have to do cash forecasting," but the task of forging effective cash forecasting is truly more critical than ever before. That makes it the right time to revisit — and retool — your company's cash forecasting strategies, as well as consider implementing best practices and adopting complementary automated cash management solutions.