Cash forecasting Achilles heel of Asian treasurers

Cash flow forecasting will continue to be one of the most important and difficult tasks for treasurers in managing liquidity risk and financing business growth, says Reval.

  • 15 Oct 2012
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The majority of Asian treasurers are unhappy at the way they forecast their cash positions, but the need to understand liquidity levels and identify the timing of future liquidity problems is one of the most importance tasks, according to a recent poll.

Ninety percent of Asian treasury professionals recently polled in Hong Kong and Singapore indicated that they were dissatisfied with their ability to forecast their cash positions, making liquidity and funding risk a top concern, while only 7.5% identified operational risk an area worth their attention, reports Reval, a provider of software for treasury and risk management.

Risk awareness has increased across Asia, but many of the region’s treasurers are still using error-prone spreadsheets for forecasting, leaving treasury potentially exposed to inaccurate global cash positions and forecasts, adds Reval.

When you are looking at cash management, it begins with whether the CFO (chief financial officer) has good visibility of his cash,” said Tony Singleton, Asia Pacific managing director at Reval to Asiamoney PLUS in a telephone interview on October 11. “The second is a more difficult step. As the CFO looks forward and projects his near term his liquidity management, and is he going to fall into a liquidity trap – that’s really where the cash forecasting comes in and is the component that the treasurers are finding more difficult to manage.”

With only 10% of respondents saying that they are fully satisfied with their forecasting processes and quality of data, the fact that operational risk is not an issue suggests that auditors, board risk committees and CFOs feel comfortable running their business on spreadsheets.

“I would encourage CFOs to consider how such a disconnect puts their overall business at risk. As organisations become more complex, it becomes harder with more subsidiaries and the geographical coverage of those business units,” said Singleton. “Organisations need to provide an environment where those subsidiaries have the ability to manage, stress test and adjust their forecasts and identify and address variances in a timely manner – that ultimately delivers cash optimisation and real business value.”

Part of the centralisation process includes the standardisation of corporates’ accounts receivable management processes – which is the collection of customers’ payments – and accounts payable processes – which is the payments to suppliers. This will help boost efficiency and reduce costs, note experts.

“Centralisation and standardisation of accounts payable and receivable management processes creates material liquidity and funding benefits by enabling clients to fund and defund accounts with greater precision,” said John Laurens, regional head of global payments and cash management for Asia Pacific at HSBC to Asiamoney PLUS. “Effective management of those cycles is the holy grail of cash flow forecasting and funding processes.”

Additionally, another one of the factors driving discussions with banks’ clients is their requirement to reduce the number of bank accounts. The more data elements that a CFO needs to gather to create that forecast, the higher the risk of inaccurate forecasting.

Streamlining the number of banks would help the corporate in terms of being able to get its hands and visibility around cash in a more holistic manner.

“Clients’ focus on rationalising their bank relationships for cash management purposes ‘defragments’ liquidity and the associated account reporting – this is important, as consolidated reporting simplifies the integration of account data with treasury platforms which improves the accuracy of cash forecasting,” said Laurens.

This has led to the increase importance of gauging trustworthy counterparties.

“They are going to place liquidity in banks that represent quality counterparties and operate within limits that are aligned with credit ratings of institutions,” added Laurens.

The survey, conducted at a recent event hosted by Reval on treasury and risk management, surveyed from 80 finance and treasury executives from companies across multiple industries in Singapore and Hong Kong.

  • 15 Oct 2012

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