“If you can’t forecast well, forecast often,” is a well worn adage for people in markets and for economists. The adage has been - somewhat cruelly - referenced to former US Federal Reserve chairman, , Alan Greenspan, who’s forecasting record was less than prescient. He did however forecast often. In the public arena bank economists are paraded out each month to make forecasts on interest rates, inflation, unemployment.
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The same pun could be said of most of them too. CFOs, however, are often under the gun when it comes to predicting cost of capital, cash surpluses and deficits and many other elements of corporate finance. Excel sheets with their formulae are great for school rooms but do they work in a world of greater complexity and an increasing reliance on technology-driven forecasting tools?
Central bankers are required to make forecasts as are CFOs and many tools are used by each party. One tool that is not so much a tech tool but more of a symptom of the need to “forecast often” is the ‘13 Week Cash Flow Report’. The 13-Week Cash Flow Report, defined as a method to forecast the cash flow needs of a company, is commonly used in businesses with complicated cash cycles. This tool is especially useful in a situation where active cash management is required. The 13-Week Cash Flow Model is used best as a "big picture" tool to see how much cash is required on a forward rolling basis. As such, it is becoming well adopted by CFOs particularly in the US where balance sheets remain in less than optimal positions, post-GFC.
The rationale of the 13-Week Cash Flow Report is clear: Having a clear sense of your working capital needs gives added impetus to collect cash and/or to generate revenue. CFOs report also that this tool is helpful when used in conjunction with the daily cash report. Many CFOs think of the 13-Week Cash Flow report as giving the strategic big picture needs, while the Daily Cash Flow Report provides a more tactical level measure of the firm's cash position.
Literally, it means the CFO can use the report to project cash flow expectations into the coming weeks. The underlying strength of this methodology is that it avoids CFOs falling into the trap that Mr Greenspan found himself in defending his legacy (a too-lenient monetary policy environment). The methodology needs little of the econometric and the more high tech models that peer into the future (but with often rubbery results), requiring only tangible data derived from old-school accounting favourites such as ‘beginning cash balances’, ‘estimated cash receipts’, ‘estimated payroll’ and taxes, ‘estimated operating expenses’, ‘lease payments’, accounts payable.
New technologies that embrace ‘predictive’ models designed by MIT quants are great for the sell side brokers of Wall Street but down in the offices of industrial and commercial Australia, the CFO can enjoy the ease of a staffer populating the 13-Week Cash Flow hence freeing himself to tackle the sticky problem of stakeholder relationships.
As Yogi Bear reminds us “it is difficult to make predictions, especially about the future”.
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