Features : Treasury & Cash Management

Ask any corporate treasurer or collections manager how they do their cash forecasting, and they are likely to reply, "On the back of a cigarette packet," or, in the case of David Gondorf, worldwide credit and collections manager for Silicon Valley-based data storage provider Network Appliance, on a 10-inch-thick print-out he would take home every weekend and manually sort through. "I would keep a tally, come in on Monday and report to senior management. It took forever," he says. It sounds primitive but Gondorf is not alone. Until recently, says John Wilson, director of treasury for one of the world’s largest futures brokers, UK-based Man Financial, most of the broker’s cash processing was done manually. Man Financial’s business is unusual in that its cash forecasts tend to be more intraday, rather than long-range (weeks, months), and since implementing IT/2, an automated treasury management system from SimCorp, Wilson says this has become much easier. "If we are expecting $4 million coming in, it [IT/2] is pretty powerful in terms of helping us better manage real-time intraday flows," he says. While technology can provide companies the capacity to forecast cash balances more accurately and track money as it moves into and out of accounts, anecdotal evidence suggests that the majority of companies are still living in the dark ages. "There are still companies with two people crunching numbers on spreadsheets," says Patrick Coleman, sales and marketing director at treasury management systems vendor SimCorp. A number of studies back this up. According to a Schmidt CS Survey cited by HSBC, 79% of companies polled still used spreadsheets for cash forecasting. HSBC’s own survey of its corporate customers found that 42% rely on manual forecasts, something with which 80% are dissatisfied. "There is a lack of confidence in many companies with respect to cash flow forecasting," says John Nicholas, manager, business development, global payments and cash management, HSBC. "A lot of companies do their cash forecasting using spreadsheets or in-house systems, which are manually intensive and prone to error. Companies are receiving information and making investments based on information that is wrong," he note

Releasing Trapped Cash But why have companies neglected the collections process, when other parts of the business have instituted far-ranging efficiency measures such as payment factories, centralized treasury operations and shared service centers? Nicholas says account payables or a company’s payment obligations have tended to receive more focus. "The challenge is on the receivables side," he explains. "If you can predict with 90% accuracy when a receivable will hit your bank account, you can start to position for that." In 2003 REL Consultancy estimated there was E600 billion in ‘trapped capital’ in the corporate supply chain—that is, money that a company may not know about and therefore is unable to re-invest or deploy to another part of the business. In 2004 the amount of ‘trapped capital’ was estimated to be E580 billion.

Regulators Encourage Insight

Some of the incentives for companies to start plugging this gap include reduced borrowing costs and overdraft limits and more favorable credit terms. But perhaps more importantly, regulatory oversight in the form of Sarbanes-Oxley and new accounting regulations FAS133 in the US and IAS39 in Europe, which require companies to report the outcome of hedge forecasts as part of their P&L;, demand that companies have a better insight as to where their cash is and how it has been invested.

"Sarbanes-Oxley is a key ignition point," says Sanjay Srivastava, COO of Aceva, a California-based enterprise application software provider. "Regulators are asking, ‘How are you managing this?’ So what we are seeing now with Sarbanes-Oxley compliance-related issues is that companies are moving from a Post-it note Excel spreadsheet environment," he adds. Srivastava says the first step companies need to make is to automate manual processes.

"We started looking at automation around forecasting," says Network Appliance’s Gondorf. "The balance sheet is really important to our CEO." Gondorf rolled out Aceva’s receivables management suite across its global operations in at least 11 countries. Gondorf says the main benefit is time saved. "It is not only helping with our collections but also our ability to release orders from credit hold," he says, "by helping our credit analysts make decisions more quickly."

According to Coleman, SimCorp’s IT/2 treasury management system provides global companies with an integrated view of their overall treasury positions so they can do more comprehensive forecasting and make better cash management and hedging decisions. Wilson of Man Financial says by automating cash processing it now has a real-time view across multiple currencies.

Man has also combined IT/2 with SWIFT messaging, which enables it to receive real-time advices from multiple banking providers of activity across its accounts, something it could not do before with proprietary banking terminals. This in turn has helped support real-time reconciliation and liquidity forecasting. "So we are not only aware of cash balances on our own books, we can track cash as it moves," Wilson explains, adding that it is also using this data to build a "bigger picture" by modeling forecasts and stress testing. "So if 80% of our receivables don’t come in, I can stress test what that does to my balances. In terms of hedge accounting we have the information that enables us to assess the financial impact of that," he says.

Implementation Presents Challenge

The technological challenges in achieving this data utopia are significant. Most companies, especially those with a global network of subsidiaries, often have different ERP systems, which may not be integrated with their treasury management systems. HSBC’s customer survey found that systems integration is a key barrier to implementation. These technological hurdles need to be overcome before companies can automate and capture the data required to make more accurate forecasts. "A lot of companies are upgrading their ERP systems because they are finding when it comes to collections forecasting, it doesn’t meet their needs," says Srivastava. In some cases, though, the biggest challenge is not so much integrating disparate systems but empowering the people who provide the data—the ultimate end-users of automated solutions. Gondorf concedes that implementation is the hard part. "We are still trying to make sure that everyone understands the importance of this," he says. "I am competing with collections managers who work 10 to 14 hours a day, and they don’t just do collections. The technology needs to make it easier for them."

Impetus Must Come From The Top