Cash Forecast: Cloudy but Clearing

Ask five companies how to forecast cash, and you'll get five different answers. Many companies don't forecast cash at all. But better technology, changes in commerce and tightening credit are spurring more corporations to produce reliable forecasts.

Cash forecasting is widely recognized as the foundation for shrewd corporate financial management. It's also widely ignored. "Many corporations don't forecast at all, which is disappointing in light of how easy it is to set up a simple program that will have benefits that surely exceed the costs," reports Robert H. Hamilton, senior vice president at Wachovia Treasury Consulting in Atlanta. "They just don't see the value in it."

Companies that don't forecast generally give one of three reasons for that decision: They think that cash forecasts are always wrong; that they're difficult to do; or that, unless cash is scarce, the rewards of cash forecasting are less than compelling.

These claims have some validity. "Forecasting is one of the hardest treasury tasks to accomplish," says J. William Murray, senior vice president, e-commerce, at Allfirst Bank in Baltimore. "If your cash inflows and outflows don't form a pattern you can graph, you won't be able to forecast cash with any success."

Technology has yet to streamline the process. No software vendor has been able to build a dominant product because each company has its own way of predicting cash flow, explains Michael A. Poisson, Fairfield, N.J.-based vice president of sales for SunGard Treasury Systems Inc., a treasury solutions provider. "Ask five companies how to forecast cash, and you'll get five different answers," he notes. Reflecting their ambivalence toward cash forecasting, finance executives picking a treasury system usually ask about the cash forecasting module as one of their first questions, but it's one of the last features they implement, he reports.

Why Forecast?

So, why even bother trying? Two reasons: to provide reliable liquidity and, beyond that, to maximize investment income or minimize borrowing costs, explains Bruce Lynn, formerly managing partner of the Financial Executives Consulting Group LLC in Darien, Conn. When there is a gap between cash needs and the forecasted cash position, treasury can work to close that gap, he notes.

Forecasts also help finance executives manage currency exposures, says Omer Ehtisham, director of sales for Integrity Treasury Solutions, a treasury solutions provider in Chicago. The accounting provisions of FAS 133 (accounting for derivatives) have raised the stakes for forecasting, he insists. "In the pre-133 world, if a forecast was wrong and a currency trader overhedged, it meant nothing. He'd simply reverse out the position and square the book. But post-133, there are real P&L implications to being overhedged. That's why cash forecasting now has huge implications and is getting the attention of CFOs."

In addition, with credit standards tightening, a good forecasting track record may help businesses get new credit. "Lenders will expect borrowers to watch their cash closely," notes James Suttie, president and CEO of Selkirk Financial Technologies Inc., a treasury management systems vendor based in Vancouver, British Columbia. For example, the Loewen Group, a Toronto-based operator of funeral homes across the United States and Canada, bought Selkirk's Treasury Manager software after going into Chapter 11 bankruptcy, partly to convince creditors that it had a handle on cash flow and could make accurate forecasts, Suttie reports.

"All it will take is one good recession" to bring back cash forecasting, predicts George B. Rush, senior vice president of business development for Gateway Systems Inc., a treasury software development business in Barrington, Ill., and a former corporate cash manager. "You need forecasts when you set up your lines of credit and your commercial paper programs. If you're going to need $6 million tomorrow, you can't find out today. You needed to know six months ago," he points out.