The Role of Trade Finance in Working Capitalbenefit from implementing a cash flow
forecasting system. Cash flow forecasts
help the treasurer to predict the likely cash
receipts and disbursements. From this the
treasurer can then predict the likely cash
balances, anticipating when cash will need to
be raised from external sources.
Calculating the cash flow forecast can
be a complex task. Smaller companies
can usually develop an effective cash
flow forecast using a spreadsheet. Larger
companies, with more complex bank account
and liquidity management structures, will
need to implement a more sophisticated cash
flow forecast. Introducing a cash flow forecast
will provide a significant benefit for all types
of companies – either through a lower cost of
funding or, for cash-rich companies, higher
potential returns on investment.
For companies trading internationally,
developing a cash flow forecast will also help
them to understand cash flows in different
countries, improving the management
of foreign currency payments and the
associated foreign exchange risk.
Many different techniques are used to
develop a cash flow forecast. A receipts
and disbursements forecast identifies all
the anticipated future cash inflows (sales
receipts, for example) and cash outflows
(loan repayments and supplier payments,
for example) for a particular time period.
These are aggregated and combined with the
starting cash position to provide the forecast
cash position for the time period. Statistical
techniques including moving averages and
distribution forecasts are also used, often
as part of a receipts and disbursements
model, to predict likely future cash positions.
For longer-term forecasts, balance sheet
modelling is often an appropriate tool.
By implementing a cash flow forecasting
system, the treasury department will be able
to exercise greater visibility, and usually
control, over subsidiaries, as long as the
subsidiaries are required to feed data into
the system. With greater visibility over
current and future trends, the treasury can
play a greater role in managing working
capital effectively, by identifying where cash
is needed and where cash can be moved
from to fund cash-poor group entities,
ultimately resulting in lower external cash
borrowing requirements.
How a company chooses to use its cash
flow forecasting system will depend on its
particular requirements. At the very least,
the treasurer will want to make sure funding
lines are in place to meet anticipated peaks
in requirements, especially in the short term.
Clearly the timescales for the accuracy
of the systems will also vary according
to the nature of the product life cycle.
However, demonstrating good control and
understanding of current and future cash flows
will help the treasury negotiate efficient rates
for any external borrowing, as long as the
bank or other finance provider understands
and trusts the cash flow forecasting system.Liquidity management techniques
Another way treasurers can help to improve
the management of working capital is through
the effective use of liquidity management
techniques. In general terms there are two
main issues for the treasurer to resolve. First
the treasurer needs to identify where bank
accounts should be held by the company, and
in which currencies they should be opened.
Second, the treasurer then needs to identify
the most efficient way of linking the bank
accounts, so the company has access to as
much of the cash as possible.
Companies trading internationally need
to consider carefully whether they need
foreign bank accounts to speed collections
and manage disbursements. In effect, an
exporting company will need to decide
whether it is possible to collect payment from
international customers using their home
country bank account. Much will depend on
the nature of the transactions and the identity
of the company’s international clients, as well
as the way the exporter operates outside
its home country. If sales are made through
a subsidiary organisation, it will usually
be more appropriate for the subsidiary to
open local bank accounts in its country of
operation. The challenge for the exporter is to
make it as easy as possible for customers to
pay, whilst operating a cost efficient liquidity
management structure which does not result
in cash lying idle in numerous bank accounts
around the world.