Paths to Cash Forecasting

Company-specific conditions set the parameters for cash forecasting, but overall objectives and difficulties remain consistent across all sectors.

Accurate cash forecasting enables companies to ensure liquidity, maximize investment income, minimize borrowing costs, secure new lines of credit, manage currency exposures and anticipate financial risk. Companies that don't produce good cash forecasts are penalized in the markets and by their bankers and business partners. "After witnessing the punishment that the capital markets have inflicted for missing earnings estimates, it is easy to understand why forecasting is a priority for CEOs and CFOs," says Bryan Hall, Atlanta-based practice director with Parson Consulting, a finance and business support advisory firm.

Forecasting is an extraordinarily difficult task, but companies are achieving greater accuracy and pushing their forecasts further out by exploiting new technology and improved modeling techniques and by ensuring that business units submit timely, comprehensive projections. Because the variables involved depend entirely on a company's business lines and cash cycles, no single forecasting approach is meaningful for all organizations. However, most companies share similar forecasting objectives and face common problems. A glance across the spectrum of cash forecasting methods provides a useful inventory of the possibilities.

Objectives and Time Frames

At the more complex end of the cash-forecasting spectrum are large, multi-unit entities in volatile industries such as the energy sector. At Entergy Corp., a New Orleans-based integrated energy company with more than $9 billion in annual revenues, forecasting runs out to five years and covers contingencies ranging from currency fluctuations to weather changes.

The company's objectives for its cash forecasting efforts are twofold. "First, immediate cash needs for unexpected plant outages and other expenses must be covered by investing short in euros and commercial paper," says cash manager Steve Myers. Second, "longer-term operational goals, including acquisitions, dividend payments and stock buybacks, require cash to be held in longer-maturing vehicles that increase return while maintaining a low-risk exposure."

For its short-term purposes, the company's treasury department prepares a 90-day rolling cash forecast for its regulated utility companies to determine short-term investing strategies and to ensure that adequate cash is available to meet working capital needs. To improve accuracy, treasury has identified large recurring payments -- fuel purchases, taxes and dividends, for example -- and large one-time payments such as bond purchases and redemptions. Business units provide treasury with the necessary data weekly by e-mail or interoffice mail, and the forecast is updated each week to reflect the most current information.

In addition to this short-term projection, Entergy's utility finance department prepares a five-year forecast using a financial planning model from consulting firm Utilities International Inc. This forecast enables the company to monitor its overall projected financial condition and to determine whether it needs long-term debt financing. On a monthly basis, the utility finance department coordinates with the business units, which enter their current estimates into the model to update the forecast.