Cash Forecasting Financial Planning

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1 Cash Forecasting Financial Planning Kathy A. King-Griswold Kevin L. Noland University of Rochester University of Illinois Cash Forecasting in a Complex Environment I. Importance II. Objectives III. Difficulties IV. Process V. Practices and examples VI. Summary 2 1

2 Importance of Cash Forecasting Top priority for treasurers 3 Why? Visibility and greater control; mitigate both business and financial risks. Keep business decision-making on track to maximize investment opportunities devise remedies for anticipated cash shortfalls 4 2

3 Benefits Reduce volatility of cash balances Serves as an early warning signal 5 Growing Importance of Forecasting General lack of liquidity in the market Economic slowdown Measure as a barometer of the future health of a company Strategic planning for maturity of investments 6 3

liquidity in the market Economic slowdown Measure as a barometer of

4 Objective of Cash Forecasting Liquidity Management Monitoring and setting strategic objectives Budgeting capital Managing costs and maximize interest earnings Protect corporate balance sheet 7 Difficulty in Forecasting Figure 1: Importance of cash flow forecasting contrasts with accuracy Source: GTnews.com: Improving Cash Flow Forecasting 24 Feb

corporate balance sheet 7 Difficulty in Forecasting Figure 1: Importance of cash flow

5 Key Causes of Poor Quality of Cash Forecasting Figure 2: Customer-to-cash based barriers to accurate cash flow forecasting Source: GTnews.com: Improving Cash Flow Forecasting 24 Feb The Forecasting Process 1. Horizons Forecasting 2. Data Source 3. Data organization 5. Choose Forecasting Method & Data Validation 4. Degree of certainty 10 5

com: Improving Cash Flow Forecasting 24 Feb 2004 9 The Forecasting Process 1.

6 Forecasting Horizon Choose the horizon best aligned with strategic objective of forecasting. Short-term- day, week, month Medium-term-up to one year Long-term-one year and beyond 11 Short-Term Horizon + Receipts: Tuition, lockbox, research, patient care, etc. - Disbursements: A/P controlled disbursement, foreign drafts, ACH, payroll, payroll ACH, wire transfers, etc. = Net cash flow + Beginning cash balance = Ending cash balance - Target balance = Investable funds/deficit financing requirement 12 6

Tuition, lockbox, research, patient care, etc.

7 Medium-Term Horizon Receipts & disbursements forecast Distribution forecast Simple average Regression analysis 13 Long-Term Horizon Pro forma financial statements Historical relationship between balance sheet accounts Statistical forecasting Time series Regression analysis 14 7

forma financial statements Historical relationship between balance

8 Data Source Internal and external Historical data from Financial, HR, A/P, etc Current year operating and capital budgets Bank reporting You and your coworkers knowledge 15 Data Organization Receipts Disbursements Projected ending cash balance rolled forward to the end of the fiscal year Keep it simple! 16 8

coworkers knowledge 15 Data Organization Receipts Disbursements Projected

9 Data Validation Validate by fiscal month Variance allows for continuous improvement of the model Two columns are added-actual flows by cash component and variance 17 Practices to Enhance Cash Flow Forecasting 1. Improve Data availability and Quality Treasury workstation and technical support A single master account A treasury intranet site for information sharing Utilize specific knowledge from business units and manage to management s expectations 18 9

Improve Data availability and Quality Treasury workstation and technical support A single master account A

10 Practices to Enhance, continued 2. Migrate vendors to E-Payments 3. Calculate the opportunity loss of inaccuracy in forecast 4. Statistical analysis 5. Treasury as a planning resource 6. Monitor plan 7. Utilize ERP and technical support 19 Cash Forecast Practice History began 2000 Centralization Treasury Office One master bank account Categories of receipts and disbursements Monthly and Yearly forecasting Regression Analysis 20 10

Treasury as a planning resource 6. Monitor plan 7.

11 Practice Includes Regression Analysis Historical data Build on time series and seasonality Linked to other internal spreadsheets automation Template and linkage to database Backup Data! 21 Cash Flow Forecasting Repeatable model for future years Permits long term forecasting Integrate strategic planning 22 11

13 25 Cash Flow Forecasting Historical data tracked by business day since 1987 Treasury responsible for short-term forecasting (< 6 months) Multiple bank account structure assists in identifying, recording, forecasting Basis for Operating Funds pool investment decisions 26 13

months) Multiple bank account structure assists in identifying,

14 Cash Flow Forecasting Predictable Cash Flow Categories use history for forecasting Erratic Cash Flow Categories use history plus direct contact Variance analysis helps us improve State receipts regular contact with Comptroller keeps us high in the payment queue 27 Cash Flow Forecasting (In Thousands of Dollars) UNIVERSITY OF ILLINOIS - CASH FLOW PROJECTION FOR NOVEMBER 2005 FORECAST ACTUAL RECEIPTS: LAST YEAR URBANA OVER THE COUNTER RECEIPTS $ 16,470 $ 16,000 $ 16,954 CHICAGO OVER THE COUNTER RECEIPTS 6,835 6,500 6,815 SPRINGFIELD OVER THE COUNTER RECEIPTS 1,279 1,300 1,268 URBANA GRANTS & CONTRACTS 33,993 34,000 33,159 CHICAGO GRANTS & CONTRACTS 33,377 33,500 31,819 SAR/GAR LOCKBOX 8,460 7,500 8,201 STATE-PUBLIC AID 14,600 15,000 14,478 STATE-APPROPRIATIONS 13,000 5,000 22,481 STATE-PAYROLL REIMBURSEMENT 63,000 63,000 60,000 STATE-IL STUDENT ASSISTANCE COMMISSION 10,100 10,000 9,611 STATE-DIV OF SPECIALIZED CARE FOR CHILDREN HOSPITAL LOCKBOXES 24,050 25,000 22,791 COLLEGE OF MEDICINE CLINICAL LOCKBOXES 5,074 5,600 4,625 ROCKFORD & PEORIA MEDICAL 3,000 3,100 2,725 STUDENT LOAN REPAYMENTS CREDIT CARDS 3,680 3,900 3,363 ECHECKS AND UIPAY CCARDS 6,275 7,500 4,063 MISC 700 1,500 10,376 FOUNDATION TRANSFER TO UI 9,950 12,000 8,295 TOTAL RECEIPTS $ 254,641 $ 251,220 $ 261,526 DISBURSEMENTS: FORECAST ACTUAL LAST YEAR A/P CHECKS CLEARING $ 90,540 $ 93,000 $ 90,519 PAYROLL 118, ,000 99,655 PAYROLL TAXES 23,380 23,500 22,196 TSA/403b 5,055 5,200 3,862 STATE UNIVERSITY RETIREMENT SYSTEM 13,775 14,100 11,771 IDPA REIMBURSEMENT 6,300 7,000 7,849 P-CARD 11,000 11,500 9,500 MISC. DISBURSEMENTS 12,018 10,000 11,605 STUDENT REFUNDS 3,280 3,400 3,250 TOTAL DISBURSEMENTS $ 283,533 $ 286,700 $ 260,

RECEIPTS: LAST YEAR URBANA OVER THE COUNTER RECEIPTS $ 16,470 $ 16,000 $ 16,954 CHICAGO OVER THE COUNTER RECEIPTS 6,835 6,500 6,815 SPRINGFIELD OVER THE COUNTER RECEIPTS 1,279 1,300 1,268 URBANA

15 Cash Flow Forecasting (In Thousands of Dollars) Operating Funds January through September 2005 Actual through June 17; Projected June 18 though September $900,000 $800,000 Actual Projected 6/17/2005 $643 $700,000 $600,000 Million Expected Low Low Point Point 8/17/05 $491 $479 Million Million 8/17/05 Dollars in Thousands $500,000 $400,000 Cash, IL Funds, C F Amervest WAMCO Lincoln Cap NTC, End Pool $300,000 $200,000 $100,000 $0 01/31/05 02/14/05 02/28/05 03/14/05 03/28/05 04/11/05 04/25/05 05/09/05 05/23/05 06/06/05 06/20/05 07/04/05 07/18/05 08/01/05 08/15/05 08/29/05 09/12/05 09/26/05 Period Ending 29 Summary Cash forecasting - important tool for financial planning and could be the catalyst for hard dollar savings. Improvement projects require a strong commitment and a skilled and multidisciplinary team

Pool $300,000 $200,000 $100,000 $0 01/31/05 02/14/05 02/28/05 03/14/05 03/28/05 04/11/05 04/25/05 05/09/05 05/23/05 06/06/05 06/20/05 07/04/05 07/18/05 08/01/05 08/15/05 08/29/05 09/12/05 09/26/05

16 Questions/Comments? We welcome the sharing of your knowledge of cash forecasting. Thank you for opportunity to share our practices! 31 16

Cash Forecasting & Working Capital Management TREASURY WORKSHOP Barry Wolde Yohannes

Cash Forecasting & Working Capital Management TREASURY WORKSHOP Barry Wolde Yohannes May 2007- Dubai Agenda Benefits of Forecasting Critical Critical Success Factors Common Forecasting Problems Methodologies