• Strategy
  • CFO Europe Magazine

Cloudy or Clear?

Fundamentally a simple concept, forecasting cash flow nonetheless proves elusive in practice.

When managers at Leica Microsystems get a call from their treasurer, Burkhard Straub, they know it’s serious. Ever since he joined the €540m ($662 million) German high-tech optical device maker three years ago, business unit heads have had to submit rolling monthly cash flow forecasts covering three, six and 12 months — if the treasurer spots a variation in an actual versus forecast of more than 15% for the three-month projections, “I have no limitations as to whom I can speak with to set up a project team to improve the forecast,” notes Straub. “When colleagues see my name pop up in their email, they know it’s important, and I get a good response.”

That response has translated into a “remarkable improvement” in forecasting cash flow at Leica, enabling “an improved return on the funds invested, quicker pay-down of debt and a reduction in foreign-exchange transactions,” says the treasurer.

Ebb and Flow

Straub should consider himself lucky. Most finance managers grouse that their companies aren’t producing cash flow forecasts as quickly or as accurately as they should. In a global survey sponsored by working capital consultancy REL last summer for GTNews, a treasury news portal, only around one quarter of the 231 companies polled said the accuracy of their cash flow forecasts was “high” or “very high.”

What’s more, another survey — this one carried out earlier this year by research firm BDRC on behalf of ABN Amro — found that while 82% of 61 European treasurers polled said cash flows could be predicted with reasonable accuracy up to two or three days ahead, the figure fell to 72% for a week’s horizon, 12% for six months and 2% for more than two years. For CFOs who need to supply investors, bankers, analysts and business partners with a clear financial outlook, alarm bells should be ringing.

Part of the problem is scale. Getting a reliable picture of future liquidity requires continuous collection of information right across the entire organisation. That’s much easier said than done. “Cash flow forecasting is absolutely core to a business, but there are so many people and departments that impact the quality of a forecast that it’s a challenge to get it right,” says Bas Rebel, manager of the cash flow management practice at Zanders & Partners, a Dutch treasury consultancy.

Mario Tombazzi, a consultant at JPMorgan Treasury Services in London, agrees, adding that “collecting accurate and detailed information on cash flow projections can turn people off if the process becomes too onerous.” The truth is, he says, that without clear direction coming from finance, “the people who provide the data don’t see the benefit of their efforts,” and for this reason, underestimate the problems they cause when supplying finance with poor-quality data that’s fed into forecasts.

Carrots and Sticks

But there are ways to bring colleagues in line. Peer pressure is one. At Leica, Straub uses SimCorp software to publish monthly rankings of business units’ cash flow performance compared with forecasts. “You find that some people don’t like to be last for too long,” he notes. “It’s getting competitive.”


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