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  • CFO Europe Magazine

Cloudy or Clear?

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

Plans are also afoot to strengthen the stick Straub uses to punish units with consistently poor forecasts. “If they forecast an outflow of X, and the actual result is an inflow of Y, I will charge them the interest on the delta I could have invested if I had seen this cash flow accurately,” he says. “That will focus the mind.”

At Pilkington, a £2.8 billion ($5.2 billion) UK-based glass manufacturer, CFO Iain Lough prefers carrots over sticks. In early 2002, the company wanted to shore up its balance sheet by boosting annual free cash flow to at least £100m. To reach that target, the board put at the core of the exercise an internal ratio comparing net cash (which excludes working capital) to net trading assets. Lough ran the numbers, and a net cash return on net trading assets of 14% for the group is consistent with the £100m free cash flow target.

Lough monitors this ratio monthly for each operating unit, “taking something that began as a concept for the group as a whole and turning it into a specific tool for managers to know what’s required of them,” notes Lough. “If the guy who runs our auto-glass replacement business in Argentina has an asset base of, say, £20m, what we ask for is £2.8m net cash flow as his contribution to the pot.”

Since December 2002, 40% of each manager’s annual bonus is tied to achieving this ratio. The result: net cash return on net trading assets rose to between 14% and 16% for the six months ending March 31st this year from around 7% when the project began. This translated into record free cash flow of £207m in Pilkington’s latest financial year. “Nothing’s perfect in this world, but there’s been a very good correlation on the charts we draw in the annual budget and the trend of cash flow over the year,” says Lough.

Still, when it comes to the accuracy of Pilkington’s forecast, as long as 12-month free cash flow projection remains on the right side of £100m, Lough is not troubled by the actual figure. “It sounds a bit trite, but that’s about it,” says the CFO.

But incentive programmes and the like can only go so far to improve wobbly cash flow predictions. Technology, of course, is also crucial. “The feedback we get is that corporates want to be better at forecasting cash flow, so we’ve improved those tools in our software,” explains Lee Wright, London-based managing director of SimCorp. A host of treasury software vendors like SimCorp, XRT, Trema and SunGard offer new and improved web-enabled applications to improve the access and functionality of forecasts produced by central treasury.

The rub? There’s a big gulf between what corporate clients say they want and what they actually go out and buy. “We haven’t really seen the uptake yet,” laments Wright.

Box Office Star

For his part, Jan Van Der Haegen is happy he turned to software to improve cash flow forecasts. When he joined Kinepolis, a €191m Brussels-based cinema owner, as treasurer three years ago, “the company worked very hard on the general annual budget but didn’t really have an idea of its impact on cash,” recalls Van Der Haegen. “I saw that there was marked seasonality in the income stream … during the year cash flow was very volatile, depending on things like the weather, holidays and the films on offer. I wanted to capture that.”


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