Cash Flow Forecasting

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2 Asia Pacific Treasury Management Barometer 2013 The Reality of Cash Flow Management In treasuries across Asia Pacific, the currency placed on cash flow management is moving in leaps and bounds. From liberal to restricted markets, many treasurers have embraced the notion of cash flow management and the role played by effective and functional cash flow forecasting. Encouragingly, they are having more detailed conversations with banking and technology partners to unlock the potential of their liquidity. Longer-term, they are also examining the role cash flow management can play in business expansion. And if treasurers aren t looking at cash flow forecasting, they are certainly considering it and for good reason. Although cash is still king in Asia Pacific, there is a clear-and-present need for treasurers to deploy the necessary resources to further optimize efficiency and enhance visibility of cash. For numerous corporations across the region, the primary focus has shifted from transparency, ensuring visibility and location of funds to timely deployment of idle cash. As a result, the use of technology is empowering treasurers to increase the value of surplus working capital." Faisal Ameen Head of Treasury Products, Asia Pacific Bank of America Merrill Lynch A functional cash flow management structure in particular, cash flow forecasting allows corporations the freedom and peace of mind to move cash around the organization efficiently and predictably in order to enhance and facilitate the use of surplus cash. Furthermore, a cash flow forecasting structure ensures the working capital wheels are greased. To borrow a treasurer s mantra, having cash at the right place, in the right currency, in the right amount and at the right time, is the ultimate goal. The substantial mindset shift can be attributed to several key drivers, ranging from the impact of the global financial crisis, to regulatory developments such as the imminent Basel III measures to regional business expansion. Additionally, from where we stand, there exists the sentiment that corporations must account for every single dollar of liquidity. Hence the importance of an effective cash flow forecasting and associated treasury models including in-house banks, payment-on-behalf-of, receivables-on-behalf-of and payment factories. However, irrespective of the benefits, when examining the depth of cash flow management and forecasting in Asia Pacific, it is a case of more talk than action. In other words, as far as implementation of cash flow forecasting structures are concerned, there is much work to be done. But the growing sophistication of Asia Pacific-based treasurers does indicate that there will inevitably be follow through on conversations regarding the usage cash flow forecasting and treasury models, particularly when larger business goals are considered. 33

3 Asia Pacific Treasury Management Barometer 2013 The current environment According to the Bank of America Merrill Lynch SunGard 2013 Asia Pacific Treasury Management Barometer, widespread usage cash flow forecasting tools and treasury models are still in their infancy, remaining under-utilized in the region. 67% of respondents do not currently use any form of forecasting tool for cash. Of the remaining 33% who use a cash flow forecasting programs or platforms, the bulk of the respondents or 69% rely on spreadsheets. Only 26% rely on use treasury modules from ERP vendors and 23% utilize in-house applications, eschewing wide spread use of technology-based, specialist treasury management platforms. It s interesting to note that most companies struggle with varying degrees on visibility and forecasting. But, more interestingly, the companies that are least satisfied with cash forecasting are also more likely to still be manually reporting their cash forecasts. While many blame deficiencies in technology or bank connectivity for their lack of visibility, 58% of respondents indicated internal people and processes as their biggest barriers. Many quick wins could be gained by looking at internal bottle necks. Paul Bramwell Senior Vice President, Treasury Solutions SunGard Q: Do you use a cash flow forecasting treasury tool? No 67% 33% Yes 69% Q: What systems does your treasury use for cash flow forecasting and overall treasury management? 23% 26% 3% 4% 16% 10% Spreadsheet ERP (treasury module) In-house platform Specialist treasury workstations Hosted/Cloud Banking application End-to-end banking solution 34

4 There are clear reasons supporting these results. Historically, Asia Pacific has served as a complex region for treasury management. Many of these complications are out of the treasurers hands. For example, the diverse tax and regulatory environment provides challenges for corporations to establish treasury models that are conducive to optimizing cash. Furthermore, in a number of countries within the region, cash is often trapped from the rest of the corporation s global enterprise, creating cash flow issues around visibility, cash concentration and risk management. Digging deeper, there are also internal issues at play. While Asia Pacific treasury has moved forward in leaps and bounds in the past decade, many firms have proprietary legacy issues that would challenge implementation of improved technology-based cash flow forecasting processes and treasury models. According to the survey, there are several factors at play, identified by treasurers as key challenges to accurately forecast cash flow. Firstly, inaccurate sales target projections is cited as a major issue faced by treasurers regionally, and by extension, a primary deterrent for implementing cash flow management structures. Secondly, a lack of internal systems integration, inadequate centralized reporting process and limited availability is highlighted by respondents as an inhibiting factor for accurately forecasting cash flow. Q: What are the key challenges to accurately forecast your cash flow? Inefficient collections 11% processes Inaccurate sales 20% targets/projections Inefficient invoicing systems 7% Other 3% 19% Lack of internal systems integration 5% Lack of bank connectivity 13% Lack of centralized reporting process 13% Limited availability of resources (i.e. staff and investment) Not applicable (Totally satisfied) 9% Q: What are the primary areas of focus for your treasury in the next 12 months? 18% Concentrating cash 13% Counterparty risk management 18% Yield enhancement & minimizing interest expenses Improving cash visibility 25% 16% Rationalizing bank accounts Other 3% Talent management 7% 35

5 Asia Pacific Treasury Management Barometer 2013 But in the same survey results, there is a silver lining that demonstrates that an actionable shift towards cash flow forecasting and treasury models is imminent. The top challenges highlight that attitudes towards implementing a cash flow forecasting and treasury model are more internally-based rather than driven by external factors such as availability of technology tools from vendors or the capabilities of the local and international banks. In our view, the impetus for a clear move towards sophisticated cash flow tools is on the cards in Asia Pacific, if factors such as, under-penetration of technology and business growth ambitions are examined closely. The priority of visibility Bank of America Merrill Lynch and SunGard asked treasurers in Asia Pacific to identify their primary areas of focus for the next 12 months. The results were quite compelling, from a cash flow management and forecasting perspective. One quarter of total respondents (25%) in the survey pinpointed improving cash visibility as their main treasury priority. This is significant. Firstly, let s examine why cash visibility is core to a functional treasury. Improving the visibility of operational cash enables treasurers to provide more meaningful analysis, delivering an accurate snapshot of where their corporation s cash lies. Additionally, visibility enables more effective use of cash capable of funding different departments and ensuring timely and secure payments, especially as information is more readily available. For example, many companies with sub-par visibility of cash were stung by the global financial crisis. In numerous markets globally, credit dried up as banks reigned in lending and instituted stringent policies. Further complicated by lack of enterprise cash visibility, internal sources of funding were not utilized and the working capital cycle for many corporations were negative. Although lessons were learned and more conversations focusing on cash flow forecasting resulted from the credit crunch, the vast majority of treasury respondents believe that their level of cash visibility is not where it should be. Over 73% of treasurers polled believe that their level of cash visibility is sub-optimal. Broad (>70% - 90%) 32% 27% Optimal (>90%) Average (>50% -70%) 32% 9% Below Average (< 50%) 36

6 Examining this data, two conclusions can be identified. Firstly, that cash visibility in Asia Pacific is justifiably the primary priority for treasurers. Secondly, that the majority of treasurers believe they are still exposed to the potential pitfalls associated with lack of visibility. Only 27% of respondents believed that visibility of enterprise cash is optimal, which is concerning, especially given recent history, ongoing volatility in the markets and the omnipresent threat of global credit freezes. Furthermore, this data does beg the question of how treasurers in Asia Pacific can optimize cash flow visibility. While internal practices evidently need to evolve for many corporations, technology is clearly one area that should be examined seriously to drive implementation of effective cash flow forecasting and treasury models. By taking this approach, instead of spending effort in consolidating and inputting cash balance information, treasurers can devote more time on cash utilization and take strategic decisions on their cash flows. Our research also shows there is an evident correlation between improved cash visibility and the frequent usage of mobile devices, with users of mobile devices indicating a marked improvement in their overall cash visibility. Of the companies pinpointing optimal cash visibility, 71% of those that use mobile devices for treasury functions are accessing their systems via mobile devices on a weekly basis. Mobile access weekly 71% 57% 52% 44% Cash visibility Optimal (>90%) Average (>50% -70%) Broad (>70% - 90%) Below Average (< 50%) 37

7 Asia Pacific Treasury Management Barometer 2013 The technology question - making cash actionable Using mobile technology as an example, globally, when cash flow is concerned, technology often emerges as the great incubator. Outside of the region, the use of technology within cash flow management is broader. From where we stand, in Asia Pacific, the relationship between technology and cash flow management is at a different level, but by no means a lost cause. For those treasurers that do use some form of cash flow forecasting, spreadsheets is the primary avenue of management. According to the 2013 Asia Pacific Treasury Barometer, 35% of those that do use cash flow forecasting tools, utilize spreadsheets. With spreadsheets there is no connectivity to other systems. Frequently, results are often received in other spreadsheets. The information must then either be consolidated or even manually re-keyed. This process clearly opens up the possibility of operational risk. Furthermore, spreadsheets used for processes like cash flow analysis often have multiple macros come with certain operational risks. To address these issues, several banks have started offering offline cash visibility and global cash position tools based on excel spreadsheets. Interestingly, there are certain trends emerging highlighting the growing utilization of technology for treasury management. According to the survey results, spreadsheet usage as a cash flow forecasting tool as company hits $5-10 billion in revenue. This is consistent with industry trends globally wherein as a business grows, treasurers find it increasingly complex to both consolidate and key information into spreadsheets. >$10 billion $5-10 billion $1-5 billion $500 million $1 billion $ million Spreadsheets 60% 48% 69% 77% 78% Specialist treasury workstations Hosted/cloud-based treasury management systems Treasury module from ERP vendor 28% 22% 17% 11% 9% 11% 26% 12% 11% 1% 32% 56% 33% 25% 9% In-house applications 23% 19% 29% 23% 21% End-to-end treasury and liquidity solution provided by banking partner Treasury applications provided by banking partner via ebanking portal 9% 4% 2% 2% 1% 9% 7% 0% 5% 2% Other 4% 4% 0% 5% 5% 38

8 The good news for corporates in Asia Pacific is that inroads are being made. Of the respondents that use some form of cash flow forecasting tools, usage of enterprise resource planning (ERP) is gaining traction. 20% of treasurers who are already using cash flow forecasting tools are very satisfied with their cash flow forecasting process. When comparing with the treasurers who are not using cash flow forecasting tools, only 10% are very satisfied with their cash flow forecasting process. However, experience tells us that larger corporations will typically utilize ERP treasury modules with greater frequency. Q: How satisfied are you with your cash flow forecasting processes? With cash flow forecasting tools 52% Moderately Satisfied 19% Somewhat Satisfied 6% Very Satisfied Very Satisfied 20% 3% Not Applicable Q: How satisfied are you with your cash flow forecasting processes? Without cash flow forecasting tools 28% Somewhat Satisfied 12% Not Satisfied 9% Not Applicable Moderately Satisfied 41% 10% Very Satisfied Other technology options exist for Asia Pacific corporations looking to improve visibility of cash and implement a functional cash flow forecasting structure. Specialist treasury management systems (TMS) are gaining traction for the upper end of sophisticated corporations, allowing for enhanced real-time visibility consolidated forecasting and analysis. 39

9 Asia Pacific Treasury Management Barometer 2013 Cash flow driving growth Empowered by technology, an efficient cash flow forecasting and treasury model will ultimately play a greater role in Asia Pacific going forward facilitating business growth. Across the region, cash is not only king, it's vital to long-term success. As businesses have become increasingly global, they inevitably encounter further complexities, many of which underscore the importance of cash flow forecasting. By accurately forecasting cash flow, a corporate treasurer can demonstrate when funds are needed and for how long. And by bringing together all the banking relationships across the globe, as well as joining together every business operation and subsidiary within the business, a company can take the necessary steps to become much more coordinated and efficient in today s increasingly complex world. Furthermore, business growth ambitions are a substantial catalyst for change. We believe that the desire to expand regionally will lead to more implementations of cash flow models. This will become essential as liquidity management structures become more complex. It will become more essential as RMB is more widely used, a major consideration for many expansion minded treasurers polled. The message is clear, the interest in cash flow management exists in Asia Pacific, but the implementation has not kept pace. As visibility becomes a greater priority and the adoption of technology grows, we see no reason for Asia Pacific not to become the fastest growing region for cash flow forecasting globally. 40

10 The survey results and interpretations in this report are not intended, nor implied, to be a substitute for the professional advice you would receive from a qualified accountant, attorney or financial advisor. Always seek the advice of an accountant, attorney or financial advisor with any questions you may have regarding the decisions you undertake as a result of reviewing the information contained herein. Nothing in this report should be construed as either advice or legal opinion. Bank of America Merrill Lynch is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation ( Investment Banking Affiliates ), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., all of which are registered broker-dealers and members of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured May Lose Value Are Not Bank Guaranteed Bank of America Corporation. Survey prepared February ARN5W570. SunGard is one of the world s leading software and technology services companies. SunGard serves approximately 25,000 customers in more than 70 countries and has approximately 17,000 employees. SunGard provides software and processing solutions for financial services, education and the public sector. SunGard also provides disaster recovery services, managed IT services, information availability consulting services and business continuity management software. With annual revenue of over $4.0 billion, SunGard is one of the largest privately held IT software and services companies. For more information, please visit HYPERLINK "