A member’s quest to improve cash visibility begins to bear fruit just as the crisis hits.

“When there is a crisis, treasury becomes very important,” a member of the European Treasury Peer Group said at a recent meeting where he and a colleague shared their progress on a project to improve cash forecasting, in part by viewing cash as inventory to be optimized.

• Cash forecasting, a critical concern for treasury teams at all times, is especially important amid the extreme uncertainty created by the pandemic.
• “We get taken out of the shadows and up to the front,” the member said of crises. “Can we quickly ascertain where the cash is? Can we see it in real time?”

Then and now. When this company’s multiyear journey to digitize treasury began, the team manually prepared custom spreadsheets for once-daily consumption. 

• Pain points included balances in nonfunctional currencies and how cash stacked up against target balances. 
• Today’s automated daily process generates mobile-friendly descriptive cash dashboards with current and historical data that users can drill into. 
• This allows the cash team to be guided by hotspots that require action and to make better decisions on what cash to move where and how to use it. 
• “The tool has to be able to tell us where we are today and tell us where we are going to be in three to six months” and whether there will be money for buybacks, dividends and M&A, the member said.

Cash as inventory. The team’s ultimate aim is to automate cash flow forecasting using analytics (AI models) to optimize cash levels, similar to how product inventory can be optimized. 

• Next comes the optimization into the automated forecast, plus building in predictive analytics based on external economic indicators. 
• By using data sets from the ERP and other sources of financial data, plus AI technology combined with a combination of traditional forecast algorithms, the company is building a hybrid model to forecast short- and long-term cash flows. 
• It learns over time the way cash flows work and has demonstrated a high accuracy rate so far.
• Of course, a forecast cannot do everything, i.e., tax hits and unexpected events, but it can help with the amounts that are able to be predicted with pretty good accuracy, freeing up treasury staff to take action on the information rather than producing it, the member said. 

Don’t expect overnight success. Not only was it trial and error to see which forecasting algorithms—and in what combination—produced the highest accuracy, it also took time for the machine learning aspect of the tool to work. 

• “It was definitely a journey,” the presenter said, adding that it required “lots of exchanges with the data scientists.” 
• Treasury went through multiple models, saw that different model mixes yielded different results, and tried “different combinations until we got to the right combo” for the different liquidity items that needed to be forecast.
• It took many iterations until the model produced accurate results and it took time. “But as we progressed the machine learning started to kick in,” the member said.

ERP advantage. In addition to having data scientists, a single-instance ERP certainly helps the company, the member said. “We’re on one instance of SAP so it makes it easy.” 

• Companies with multiple ERPs, several instances and a TMS will soon notice that “it can get clunky.” 
• Clear ownership and KPIs for the project are also key to success.  

Optimizing cash as inventory = savings. By treating cash as an inventory to be optimized in each region and currency, the company will free up balances, earn yield on invested (vs. idle) cash, and optimize or reduce credit lines. In fact, one of the pilot regions managed to reduce idle operational balances by 46%!

A cash awareness culture results in better forecasting of future flows to support growth.

Young tech companies thriving in the latter stages of a multi-year economic expansion when many investors had lots of cash to deploy can be forgiven for not always demonstrating disciplined cash preservation.

• “We are cash rich and our culture is not sensitive to cash,” as one member put it during a discussion of cash positioning and forecasting at a recent meeting of the Tech20 High Growth Edition.
• But as companies grow and confront crises like COVID-19, they need to take a hard look at liquidity.

“You make it, we take it.” Awareness of cash generation, how cash moves through the company and who’s entitled to control it is an issue of corporate culture and education.

• Just because treasury can lay down the law on owning the cash, clear communication on events that impact cash doesn’t spring up naturally. Treasury needs to develop the relationships to ensure that this communication is efficient.

Treasury technology: critical for scaling. Good technology goes a long way to bridge some of the communication gaps regarding cash-related events between business units and treasury.

• Just over half of the companies participating in a short TMS survey reported having a TMS in place, while over a quarter have none and the rest use some variety of an in-house solution. One member said the decision to implement a TMS four years ago felt “early,” but that a TMS would be critical for scaling.

Cash positioning. For one member company, the culture is to “drink your own champagne” before seeking outside solutions. 

• The company’s treasurer has worked with product development to bring more discipline and accuracy to cash positioning.
• Some groundwork was already done, like direct bank integration for payroll, general ledger and accounts payable with its two main partner banks. This information goes to accounting but “we created a new security structure for the treasury team to use the same data but a ‘different lens’ without needing to go to bank portals and download,” the treasurer said.
• This produces a daily global cash position dashboard showing 95% of ending domestic and international balances by legal entity, currency and financial institution.
• It shows money market funds, fixed income balances from third parties, reflecting all transactions from the prior day, coded by type of accounts (ZBA, intercompany, etc.) and type of transactions.
• If a new type of transaction occurs, it can be coded for automatic recognition going forward. “This is very handy in a pandemic when you get questions from the CFO about cash.”

Cash forecasting. With limited budgets and time for systems implementations, what do you do? One member, a data visualization company, looks at how its own product can be used.

• The company has a large financial master data warehouse (using a big vendor in that space) with data around each legal entity, bank partners, bank accounts, categorization rules, account signers, etc.
• It has several years of balances organized by categories and sub-categories like accounts payable, receivables, rent and tax, and allows the ability to drill down into cross-border FX and other types of transactions.
• Treasury looks at forecasting on an individual account level and then a roll-up, and can do a 14-day daily view and an 11-week weekly view—and of course uses the historical data for a sanity check on the forecast.
• FP&A forecasts on accrual basis and treasury on cash basis. “They rely on us for the cash forecast and we rely on them for revenues and expenses.” The company reports accuracy of more than 90%. 

Bottoms-up, top-down, ERP or bank statements?

During a recent discussion about cash forecasting at NeuGroup’s Global Cash and Banking Group, one member asked if any of her peers had done demos of solutions from Cashforce.

• Another member said his company had reached the point where Cashforce is “going to demo something” once an NDA is in place. “We have found them to be very open-minded,” the member said.
• That’s important because his company has decided it does not want a forecasting system that relies on bottom-up analysis of data sourced from ERPs, in part because the company has “so many” different ERP systems and is “looking for an  AI, robotics approach” using top-down analysis.
• He said that Cashforce has “been incredibly engaged” and willing to design solutions based on a bank statement model rather than ERP data.

Multiple approaches. This member described the company’s journey, saying, “We are taking on multiple approaches, some internal, some external, trying to figure out what’s most cost effective.”

• “We’ve talked to a number of different companies and vendors; what’s worked for one company may not work for us,” he said.
• The company, the member said, is “engaging all the fintechs out there” and has found that some are focused on ERPs while others understand this company’s preference for a bank account approach.
• But as the economic effects of the pandemic mount, this member said his company is “growing wary” of fintech companies because of the impression that “cash is drying up in fintech land.”
• He said he would love to use cash forecasting supplied by a TMS, but that the experience of using the module offered by his TMS vendor is “just ok.” Sound familiar?

Pinpointing where all your cash resides—and how much you have—depends on good technology.

The COVID-19 crisis has highlighted the value of technology that allows treasury to know—in real time—how much cash is available and where it is.
 
A recent virtual meeting of NeuGroup’s Tech20HG—for treasurers of high-growth tech companies—revealed that the technology that treasury teams use varies: The pre-meting survey of members showed that 45% of respondents do not have a treasury management system (TMS), compared to 55% that do.Those with a TMS use well-known vendors, but no clear winner emerged (see pie chart). With the relative youth of the companies in the group, their ERPs are of recent vintage and acquisitions haven’t yet resulted in the use of multiple ERPs and/or multiple instances of the ERPs in use. From that point of view, things are under control.

SaaS is where it’s at. Whether members choose to implement a TMS or special-purpose add-ons to existing systems, software-as-a-service, or SaaS, is what many consider the best way of availing themselves of new technology tools.

• SaaS doesn’t require nearly as many internal IT resources to implement and maintain as installed software, and security protocols have improved to the point where IT chiefs are satisfied.
• So, if your IT teams slow you down (when was the last time treasury was first in line for internal IT projects?), cloud solutions enable faster delivery of benefits, or “quick time to value,” according to Joerg Wiemer of bank connectivity and payments provider TIS, the meeting sponsor.

Too many bank accounts? Companies doing business in many countries across the globe are likely to have many bank accounts, too. Some companies have more than one per legal entity: One for collections, one for disbursements and local concentration accounts, and possibly single purpose accounts for local tax payments for example. In any event, the number of bank accounts usually exceeds what a treasurer wants to have.

Good bank account management is the foundation for good cash management. One advantage TIS says it has is that more than 10,000 banks are connected to its cloud platform.

• TIS’s customers can then access cash balance statement data into one centralized point more seamlessly than in a heterogeneous environment where the data needs to be accessed via proprietary e-banking tools and then consolidated and analyzed.
• TIS or not, the key is to have the capability to connect to both back-end systems and front-end banks to enable real-time data aggregation and accessibility. 

And if you don’t? Whether because of poor bank connectivity or local banks’ inability to deliver statement information, a 2019 study of 172 companies by PwC reported that about a quarter of companies did not have daily visibility of all their cash. In addition, a JPMorgan study, also from 2019, concluded that cash forecasting beyond 90 days is still a challenge for many US companies. There are many contributing factors to poor cash visibility. 

• Decentralization: A complex business ecosystem in different geographies with various payment methods and banking partners using inconsistent messaging may result in fragmented data landscape.
• Lack of systems integration exacerbates challenges stemming from multiple instances of different ERP systems, bank portals, additional TMSs and HR databases.
• Poor data quality from too many manual processes. A manual data process is prone to mistakes, time consuming and the data is already outdated by the time it reaches the HQ.

Consequences of poor cash visibility. These effects are interconnected and can result in inefficiency, which can be expensive in the long run. Consequences:

• No visibility over cash flows and no holistic view of actual cash position means outdated or missing cash information to guide business decisions.
• Difficulty calculating excess cash for investing or paying down debt means that inefficient use of cash and funding costs may increase, leading to unnecessarily large cash buffers.
• Inability to track foreign currency positions to hedge risks.
• Longer time frames for creating cash flow reporting for C-Level.

On the other hand, analysis instead of data gathering. With streamlined access to balance information, treasury team members can free up their time; rather than gathering data, they can turn their analytical eye toward answering questions like:

• Do we have enough cash even if the top line drops 30%?
• Where is our cash and what is our cash position and cash exposure with our different banks?
• What does our operating cash flow look like?
• Do we run into problems with financial covenants?

Faster and cheaper. Ultimately, a well-executed technology strategy that enables access to data more seamlessly will produce returns not only in time savings from consistent and more automated processes, but also reduced bank fees, funding costs and increased cash efficiency.