The general mission of the treasury department is to manage the liquidity of a business. This means that all current and projected cash inflows and outflows must be monitored to ensure that there is sufficient cash to fund company operations, as well as to ensure that excess cashis properly invested.
In order to accomplish its objectives, the treasury must engage in the following activities:
2.1 Cash forecasting / Liquidity and Funding:
Compile information from around the company to create ongoing cash forecast. This information may come from the accounting records, the budget, capital budget, various other departments, Compliance department for any penalties, deposits to be made with the authorities, Information Technology department for any capital investment in software license, machineries, servers, etc.. Human Resources for salaries, board minutes, company secretary department for dividend payments and even the CEO office for expenditures related to acquisitions, etc.
The financial need of every department has to be met as per their schedule. This action results in avoidance of special and extraordinary costs, interests and the like. With costs being incontrol, surplus funds emerge from the system which is deployed profitably either as long terminvestments or as short-term parking tools. Both ways, the net result for the firm is an addition to profits.
Liquidity Management (Cash forecasts) are generally made over three time horizons: short, medium and long term.
Short-term:Short-term cash forecasting or liquidity management is typically with a 30 day time frame.Short-term forecasts are usually used exclusively by the treasury department to manage liquidity on a day-to-day basis. Their purpose is to aid decisions on the management of short-term borrowings and deposits, to ensure that there are no idle balances sitting in bank accounts and that shortages are detected and financed in the most cost-effective manner.
Usually prepared and updated on a daily basis – this covers the cash requirements of all departments of the entire bank for a 10 day time-frame. Most banks have this online. Various departments will provide their input (requirements) on real-time basis. The moment any department gives their input – example: a department saying they need 10 lakh after three days, this information will be used by the treasury on an immediate basis and such ad hoc requirements will also be taken care of. Most requirements are on regular basis and the treasury department has the details on the same.
Medium-term:Medium-term cash forecast is generally prepared for financial management purposes by various finance departments within the organization, finally clubbed at treasury department.
Equity analysts are putting more andmore emphasis on cash flow as an indicator of the financial health of a company. Top Management of an organization also are seeing cash control as one of the primary tools in the creation of value. As aresult the management of cash, effected through a whole series of controls over every aspectof working capital and capital expenditure, becomes a key management issue.
Most companies will produce medium-term cash forecasts on a month by-month basis, whichare then updated at regular intervals. Many will produce medium-term cash forecasts thatcover a rolling 12–18 months. Such rolling forecasts ensure that the control of cash does notjust go from financial year to financial year, but that a consistent control is taken over a 12-month cycle.
Long-term: Long-term cash forecasts generally cover a period of three to five years. These are primarily used for strategic planning process by the top brass. These cash forecasts (long term) are mostly indicative of a likelytrend of a company’s cash position. Long-term cash forecasts are not so useful in managing liquidity, but have a higher relevance in the management of company’s debt structure.
Cash forecasting is easier said than done. Most companies struggle to have this done accurately and on consistent basis. While companies can forecast the total cash outflow or in flow for the year as a whole, it is extremely difficult to achieve the same accuracy on a month-by-month basis. There are however, a number of general principles that, when applied, can lead to more efficient cash forecasting.