Achieving Excellence in Cash Flow Forecasting

Transcription

1 Achieving Excellence in Cash Flow Forecasting Jeff Schaible Baxter Assistant Treasurer Cindy Gerhard Citi Liquidity Management Services Product Management Head

2 Agenda Citi Industry Research on Cash Flow Forecasting Baxter Experience & Lessons Learned Short Term US Cash Forecasting Long Term Quarterly Forecasting Long Term Global Strategic Forecasting

3 Market Practices for Cash Flow Forecasting

4 Citi Treasury Diagnostics (CTD) Proprietary benchmarking tool used by more than 350 clients of Citi Benchmarks treasury practices in six areas, including cash flow forecasting, for insights into client s current practices Highlights strengths and weaknesses of treasury operations and risk management Following slides are a summary of CTD results for cash flow forecasting

5 Profile of CTD Benchmarks* Annual Revenue 25% 23% Industry 19% 19% 26% 45% < $5bn $5bn - $15bn 8% 7% 19% > $15bn Country Type % Revenue Outside Home Country 73% 32% 19% 0-24% 25-49% 21% 6% 32% 17% 50-74% % Developed Developing Advanced Developing * Citi Treasury Diagnostics, n = 373

6 Treasury Function Profile* Scope of Treasury Responsibilities Cash Operations Bank Relationship Management Cash Forecasting & Planning Shot Term Borrowing 89% 87% 95% 95% Does Treasury Have KPI s? 65% Yes 28% No Number of Staff Treasury Controls & Accounting Risk Management 74% 72% 20% 31% 49% >30 * Citi Treasury Diagnostics, 2013.

7 Cash Flow Forecasting Tools* Cash Flow Forecasting Process 60% 31% 2% n=374 Excel Spreadsheet complied from multiple sources Automated TWS/ ERP Input + Manual Completely Automated Companies that rely on Excel are more likely to be: Headquartered in a developing market (esp. LATAM & APAC) Local or regional footprint Use a decentralized treasury model (89%) Have not put in place an In-House-Bank Do not run shared service centers * Citi Treasury Diagnostics, 2013.

8 Constructing the Forecast* 84% Low rate of utilization for historical trends indicates an opportunity for many companies to improve forecast quality 49% 43% 38% 38% Manual Input Collections Forecast Based on Past * Citi Treasury Diagnostics, Payables Forecast Based on Past Statistical Analysis of Past Patterns Automated Inputs from TWS/ERP

9 Managing the Forecast Process* Forecast Period 24% 21% 35% 11% 7% Daily Weekly Monthly Quarterly Annually Forecast Frequency n=350 23% 27% 34% 9% 2% Daily Weekly Monthly Quarterly < Quarterly Forecast Horizon 15% 19% 25% 38% * Citi Treasury Diagnostics, Next Week Next Month Next Quarter Next Year

10 Evaluating Forecast Quality* How Often Do You Need to Reverse Positioning? Best in Class 22% 19% Room for Improvement 14% 6% 9% 13% 17% Daily Weekly Monthly Quarterly < Quarterly Never Don't Know * Citi Treasury Diagnostics, 2013.

11 Cash Forecasting at Baxter

12 Baxter Profile Global health care company with $14B in sales About 60% of sales generated offshore Complex legal structure, operating in more than 100 countries Cash forecast is critical in the US as a result of shareholder obligations

13 Baxter Background and History Current management team was installed Cash forecasting not overly necessary Legal structure allowed for cash flow into US Dividend was small and paid annually Share repurchases did not exist By late 2005, legal structure changed Cash flow into US was reduced But, HIA offset the impact and allowed for repatriation

14 Cash Flow Forecasting at Baxter onward Share repurchasing activity restarted Dividend increased & changed to quarterly payout US cash flows were lower Debt financing and commercial paper became treasury tools True cash flow forecasts became essential for Treasury to perform optimally Day 1-45 Short Term Forecast 45 day look ahead Quarter 1-4 Long Term Forecast By quarter for rolling 12 month period Year 1-5 Long Term Global Forecast Strategic Financing Plans

15 Short Term Forecast ST Forecast History helps predict the future Highly detailed sources/uses model Excel based Draws collections/ spending patterns by day from systems Utilizes dividend/ repurchase forecasts by day Evaluates capital spending and adjusts current year from previous Evaluates year to year adjustments to business models Control in place so that those who use it do not develop it Look to be within 10% of the actual cash on any given day

16 ST Forecasting Model ST Forecast Operating Cash Flows Prior Year Inflows Prior year Outflows CP Position Business Model Changes Excel Model Resulting Forecast Cash Repatriation Intercompany Loans Capital Spending Share Repurchase Dividend Forecast 3 rd Party Borrowings Investing & Financing Cash Flows

17 Forecast Output ST Forecast Beginning Balances Net Cash Inflows Net Cash Outflows Netting, I/C, M&A Ending Balance Date Beginning Balance (1) US Op. (2) US Other - (3) Option Inflow Op. Inflow Inflow (4) CP Issuance (5) Debt Issuance (6) Repatriation Net Cash Inflow (7) US Operating Outflow US Outflow CAPEX Adjustment (8) US Other- Operating Outflow (9) Share Repurchase (10) CP Maturity (11) Debt Repayments (12) Dividends Net Cash Outflow (13) Netting Flow s (14) I/C Notes (15) I/C Op Cash (16) M & A Net Daily Cash Intra- Day Adjustment Ending Balance Comments 7/1/13 $3,041,000 $70,038 $182 $70,221 -$25,993 -$2,996 -$266,072 -$295,061 -$224,840 -$160 $2,816,000 (12) Dividend Payment 7/2/13 $2,816,000 $24,631 $470 $25,101 -$11,543 -$2,977 -$14,520 $10,581 $419 $2,827,000 7/3/13 $2,827,000 $25,462 $166 $25,628 -$15,197 -$2,508 -$24,059 $1,569 $431 $2,829,000 (8) Outgoing w ire -$6,355 7/5/13 $2,829,000 $24,594 $1,349 $25,943 -$57,842 -$2,296 -$60,138 -$34,195 $195 $2,795,000 (7) Payroll 7/8/13 $2,795,000 $48,874 $113 $48,987 -$27,339 -$2,503 -$29,842 $19,145 -$1,145 $2,813,000 7/9/13 $2,813,000 $19,462 $1,619 $21,081 -$8,673 -$1,680 -$3,467 -$2,679 -$16,499 $4,583 $0 $2,817,583 (8) Outgoing wire 7/10/13 $2,817,583 $24,560 $1,619 $26,179 -$8,604 -$1,680 -$1,113 -$2,435 -$13,831 $12,348 $0 $2,829,931 (8) Outgoing w ire 7/11/13 $2,829,931 $16,966 $1,619 $18,585 -$14,539 -$1,680 -$1,288 -$1,987 -$19,494 -$909 $0 $2,829,022 (8) Outgoing w ire 401k 7/12/13 $2,829,022 $18,952 $1,619 $20,571 -$19,389 -$1,680 -$2,679 -$23,747 -$3,176 $0 $2,825,847 7/15/13 $2,825,847 $42,740 $1,619 $44,359 -$26,327 -$1,680 -$2,679 -$30,685 $13,675 $0 $2,839,521 7/16/13 $2,839,521 $24,713 $1,619 $26,332 -$10,761 -$1,680 -$2,679 -$15,119 $11,213 $0 $2,850,735 7/17/13 $2,850,735 $16,221 $1,619 $17,840 -$11,428 -$1,680 -$4,500 -$2,679 -$20,286 -$2,446 $0 $2,848,289 (8) Draw dow n on Loan 7/18/13 $2,848,289 $33,523 $1,619 $39,907 -$28,659 -$1,680 -$2,679 -$33,017 $6,890 $0 $2,855,179 (2) FX Options $4,765 Adaptable to other time periods However, going significantly beyond 45 days increases the volume of data and complexity to manage

18 Next Steps ST Forecast Continue to use the process for forecasting USD flows into Europe from subsidiaries Roll out the same process to Europe Integrate multiple currency, increasing complexity of forecasting and positioning

19 US Longer Term Cash Forecasts LT Quarterly Forecast Key objective of long term forecasting is to evaluate needs and generate detailed discussions with Senior Management on capital structure Debt financing, commercial paper balances and cash repatriation actions Baxter longer term cash forecasting process utilizes a sources/uses model but less detailed than the short term process Generate a rolling 4 quarter timeline, prepared quarterly Based on historical patterns of cash flows Excel based Target 20% accuracy for quarterly US flows

20 Global Cash Forecast LT Global Forecast Global cash forecast provides a longer term outlook of strategic financing and investing requirements. Key objectives include: Determining excess cash balances and repatriation planning Implications of strategic plans on longer term lending and borrowing needs Determining best long term use of cash Developing strategies to invest cash most efficiently

21 Global Cash Forecast LT Global Forecast Less specific detail and generally only see ending bank account details Intercompany and 3 rd party cash flows are the focus Specific inflows or outflows are not forecast Uses a system called TreasuryVision to capture global flows on a daily basis and excel to analyze the data System has been in place for about 1 year and the forecasting process is now being finalized Target 30% accuracy Expect this target to be lowered as more data is complied

22 Global Cash Forecast LT Global Forecast Baxter s Treasury Vision model uses historical daily cash balances and an algorithm based on historical patterns to predict the cash in each country Incorporates a longer view P&L forecast to predict future cash balances by country Targeting 30% accuracy vs. actual

23 LT Forecasting Model LT Forecast Historical Cash Balances Input from Treasury Vision System Position for Cash investing Cash Repatriation Baxter Long Range Plan P&L Driven Models Excel Model Resulting Forecast Longer term plan for company capital structure planning

24 Conclusion It is a long path, but the results have been valuable Better use of commercial paper in the US Less need to utilize 3 rd party lines of credit Smaller unwanted currency impacts on the P&L Resulting in lower costs and more control There is still more work to do, but we see this as an on-going journey, not a final end point.

25 Q&A Jeff Schaible, Baxter Cindy Gerhard, Citi

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