What are your cash flow forecasting and liquidity management best practices and insights?

Michael,
As with answers to most open-ended questions, the answer is it depends. I've worked for companies that were in distress/turnaround situations and cash flow forecasting was a weekly exercise. Other times I worked for start up firms and cash flow forecasting was relevant to calculate the cash burn rate of investment funds.

As a general rule, however, separate both sides to the cash flow equation: cash coming in and cash going out. Then set up metrics for each based on the life cycle stage of the business.

Best of luck,

Henry

In the end, everything can be reduced to cash flow. Connect with the business unit heads and explain to them how they can contribute to cash flow and profit optimization. Have monthly quick checks to compare performance to plan. Engage the CEO in the investment results. Over time, these efforts become automatic and can truly improve relations as well as results.

First of all understand all the players who can affect your cashflow and make sure you have a good two way communication process with them (ie tell them why they need to talk to you and make sure you have a regular conversation with them). The obvious candidates are the Budgeting department (for accounting forecasts), Accounts Payable and Receivable, and Payroll but, depending on your set-up, could also include the tax department, Project Managers (for CapEx) and company secretarial. If your cash management is run separately from Corporate Finance make sure there are no surprises there either.

In the middle of the global financial crisis I ran a bottom up daily forecast looking forward two weeks (to ensure daily liquidity), a quarterly forecast based off the corporate budget (to make sure we could prepare ahead of time for any large movements such as dividends, interest payments, bonus payments), and a 5 year capital plan (to make sure we didn't let any credit go if we might need it to redeem a debenture two years down the line).

Use the daily forecast to understand how accurate your colleagues are, especially cash collection: make sure you build enough buffer into your liquidity to allow for this variance (eg if they say they will collect $10M on the last day of the month but are usually only accurate to with $3M make sure you have enough headroom to deal with that shortfall).

Compare your three forecasts periodically to make sure they all tell the same story and that they fit in with the corporate plan - if there are significant differences try to understand where they arise (eg cash versus accounting principle).

Talk to your bank relationship manager and see if they can arrange cash-pooling, sweeps or off-sets so that you don't get dinged if you have cash in one area and a deficit somewhere else. Make sure you understand how quickly cash is available (eg will the bank let you draw on cheques immediately or only after they have fully cleared). If you have a bank that gets a lot of fee income from you (eg from corporate finance activity) make sure you leverage this to get the maximum backstop facility in return.

If you have cashflows in different currencies you may not be able to quickly translate the different flows so may need a larger float or headroom to allow for balances in multiple currencies.

If you're using Excel to model your flows make sure there are no formula errors, hard coded numbers where you expect formula etc.

Communicate upwards: I know of one company whose CFO promised shareholders an increased dividend even as the Treasurer was worried they might not be able to make payroll.

Hire a good team.

Good luck.