Intro Video Transcript

Welcome to the fundamentals of cash flow forecasting. This is been a special interest of mine to Treasury executive and consultant. I had three-plus years of experience with cash flow forecasting. I evaluated in revamped many cash flow forecasting systems. This course is intended for the beginner or someone who is taking over forecasting system and want to be sure the system is effective or needs fixing. Will take a look at broader issues and begin to explore different methods and approaches. Our focus is this course will be on the short terms. Senior financial executives who identified cash flow forecasting at a problem area for many years. A recent survey indicated over half of them question the reliability of their forecasts and feel this is an area needs improvement. In my experience I found the senior executives do not have clear-cut evaluation criteria. Their dislikes are vague, many just noted a town quote like their forecasts for trust the Treasury managers who prepared the forecast. Of course this makes it difficult to revise and improve the system. In one case a consulting client disgusted forecasting problems with me. The Treasury told me that it was often quote way off and wondered if I could build a model to replace the current method of gathering data from numerous sources. he also expressed his unhappiness with the preparer. I told him a model as possible as they had more than an updated seem predictable to me at first glance. My discussions with a preparer and a few sources however turned up a different problem. Communication. To prepare the forecast receive data from the sources but never reconnected with the sources when their estimates were off. This was a good as the treasurer for bed it not wanting to quote bother the sources unquote. So I offered him two choices, allow two-way communication with variance analysis are used to model a bill. He chose to do both and was happy with the result. In instances where the forecast is not well regarded senior executives impatiently try to fix the system quickly when they may just ignore it and ignore the forecast. Based on my experience in discussing forecasting problems with treasury staff and senior financial managers I see a distinct difference between what is expected by management and what is possible by staff. I call the former the irrational expectations on and the latter best to forecast can do. Obviously the wider this golf the more difficult it will be to resolve the difference between actual and desired and to develop an effective system. This figure shows the normal cycle for most forecasting systems. It typically starts when the sources of the forecast data send estimates for the forecasting period or periods. Note: the sources are usually people but they could also include other kept company systems. The data are compiled and reviewed by the preparer of the forecast. This case to prepare an early vantage point to be able to question data or follow up with sources that have problems so the forecast can be changed. From there the forecast is prepared and compared with actuals. This produces variances between the forecasts and actual data and these areas can be shared with sources to correct any errors or misunderstandings. This applies to people or systems. Someone has responsibility for the data input so that would be the appropriate place of contact and approach I have found useful in managing the expectations for forecasting system is to answer three fundamental questions. One can you really call your quote hunting and gathering unquote a forecasting system? Much of this depends on the performance of your sources so you need to be to objectively evaluate them. If you don't see a system it probably doesn't exist. What are you trying to forecast? This is harder than it sounds. I have looked at many systems and without scratching my head because I couldn't figure out what the forecast was supposed to be predicting. There may be lots of numbers but they should say something. For instance it is important to predict cash flows or to develop a model that reflects cash flows not just cash because the cash figures the net result of the cash inflows and outflows. Many financial managers lose sight of this important difference. Why are you doing this forecasting? If it's for you, you should have a good idea of what you need and where you're getting it. If it is for others, you'll have to find out what they're looking for and whether they're getting it. Bad forecasts can be worse than no forecasts. However you really cannot function without a forecast. there are several effects of bad forecast. If you experience one or more of the effects shown you need to take action. Primary impact is felt in your working capital. Creating uncertainty in our working capital management is handled can place a heavy financial burden. You become very limited in how much you can finance or even expect to receive on a regular basis you'll get too many surprises. As a result you short term investing in borrowing may be compromised. You can to investors shorter maturities sacrificing yield or borrow unnecessarily thereby increasing interest expense in the process. If you were a heavy borrower you can expect a lot of pressure from senior decision-makers calling for an accurate short-term forecasts. You may also discover that their excess funds in local accounts sitting idly because no one is no one tracks them. Finding a local funds can prove an unexpected cash inflow when they are discovered and transfer it to a point where they can be used. Over all your management of working capital suffers and penalize the company providing fast actions on attractive financial opportunities for getting hit adversely by changes in short-term rates.