The Do’s & Dont’s Of Cash Forecasting


Steven Player

CEO & Owner,
The Player Group


[0:00] Anchor:
So thank you for joining today’s session. On the best practices of the cash forecasting, we have with us Steve Player, owner and managing director of the Player Group. Steve has over 30 years of experience in improving performance management. He’s the co-author of ‘Future Ready: How To Master Business Forecasting And Beyond Performance Management’, as well as five other books. And we have Munish Balyan, ABB Product Management Treasury from HighRadius. And I would like to say that we have Charity over there. She’s going to circulate a signboard. If you want to gain one credit for CTP recertification, please fill up your name and email address and also we’ll be able to give you the presentation slides. So please do not forget to write your email address on that. Okay, so Steve and Munish welcome. And the stage is all yours. Round of applause, everyone.

[1:06] Steve Player
Thank you very much. Thank you very much. I really appreciate the Round of applause. You guys know you sure you’re the right session. Okay, did you leave your preconceptions at the door? Because we’re gonna challenge a few things here today. Okay, this is the dos and don’ts. What you got to realize is there’s a lot of you doing the don’ts. In finance, we do a lot of dumb stuff. I’d like to be nicer. But that’s, that’s the only way I can put it. We do a lot of really, really dumb stuff. And I’m here to tell you, it’s time to stop. Hopefully, I’ll share some techniques with you today that we will kind of help works our way through that. Now in the slide deck, which is downloadable. You can get these slides right and they’re going to have recorded. So if you really like this, you want to show it to your boss, you can get more material. It has my phone number at the end, you can call me up and ask questions, whatever. We’ll have lots of time for Q&A as we go through here. We’re going to follow a football format as drifted. I ran a lot of books, I did a lot of education. I have a membership model where we teach companies how to improve. Our main businesses teach companies how to run their business better without budgets. We repeat that “we better without a budget”. The budget is a usually negotiated document that wastes a lot of time, it’s based on a whole bunch of assumptions that are nearly always wrong. And what’s worse, you lock yourself in and then you try to explain why you’re not doing what you thought you were going to be doing based on assumptions that have turned out to be wrong, a monstrous waste of time, and very detrimental to the finance organization. Why? Because of everybody’s sandbags, you’re going to hear a lot of these presentations, people talking about forecast accuracy. Forecast accuracy. It’s really hard to get forecast accuracy when you’re full of sandbags to meet performance targets. So I’m talking about why forecast accuracy is very, very difficult to achieve and what you ought to be doing instead. Okay, this is all about background, but since you are already here, you don’t need to know about me because you’ve already decided to come. These publications. I’ve got some examples up here if you want to take a look at it afterward, this is our book on forecasting ‘Future Ready, How To Master Business Forecasting’, one of the top 20 books and forecasting of all time, a lot of my presentation is based on that. Okay. Four Quarters, we are in a football stadium. So we’ll talk about it like a football game. Let’s take you through Four Quarters. First one, the importance of cash forecasting. And we’ll touch on that pretty briefly, like a lot of first quarters, this is going to go pretty fast. The main of the matters are in the second, third quarter, I’m going to take you through 8 do’s and don’ts of forecasting what to say do’s and don’ts. I’m gonna start with what you shouldn’t be doing. And then I’m going to tell you what you should be doing instead. Okay, in between the second third quarter, like all good football games that we’re going to have that. This works better if it’s a dialogue. So I’m gonna give you a chance halfway through to start asking questions. Okay, let me worry about the time. I actually can talk really fast, I’m the fastest mouth of the South if I need to be. Okay, I’ll handle keeping the time and you will get out on time. Because you don’t get extra credit for staying late, I’ll be around afterward to answer any more questions in the chat. But we’ll get to the fourth quarter and the games are all won in the fourth quarter. The fourth quarter is really when we try to bring it home, where should you be going to get strategic and moving forward. And then at the end, I’m gonna give you a warning. There is a two-minute drill. If we don’t get through all that. It’s just a recap. If you are in time press. Just get to the slides the two-minute drill and read the recap. Okay, everybody ready? Any questions? Quick survey, how many people are doing cash forecasting? How many are doing it? Well? Okay, good. I’ll see you afterward. I always like to get the best practices. We’re all here to learn, Okay, I’m gonna give you my opinions. That’s what they are, they are my opinions, your period accepting their costs out there. They cost you as much as it takes to get that free cup of coffee outside, okay. Take them and use them. Number one, let’s get started here in the first quarter.

[5:06] Steve Player
Why is cash flow important?

[5:14] Steve Player
It is unforgivable because you don’t get to stay in business. It is the lifeblood, it is the oxygen. It is often said, you know, cash is real, everything else is just opinion. Okay, those financial statements you can miss those a lot you miss cash flow, you don’t get to breathe. Okay, and I got to tell you going up and down the stairs. I know. It’s I know it is, a good feeling but it’s important to be able to breathe. Okay. All right. This is Treasury strategies put out this survey. They’ve been doing this for a long time. They were there on the podium here today so strongly says they got good research, consistent ranking cash forecasting. Number one most important job in Treasury. Okay, you got to keep up with this. You’ve got to keep up with this if you miss everything else. I work out of the Addison Treehouse just north of Dallas. It’s a great incubator, a lot of startup companies there. The most important thing for every one of them, how much cash do you have? How much runway, how much burn rate? You might be a big company, you may be Exxon, you may be shell or you may have a lot of money. What do they care about? Cash? Why? Because cash is your reinvestment flow. If you’re a hospital, Community Hospital, they’re not for profit. What do they care about? Cash. Why because if they don’t make some cash, they don’t make some income. They have no money to reinvest. So even if you don’t need it to breathe, you need it to reinvest. So the most important thing for you is from the time you take $1 and you invested in a person or a product or a service, how long does it take to convert that investment into cash coming back in? Because that cash to cash cycle is the sale for your business. Okay. And as Treasury, we play a big role in that. So it’s very, very important. Working Capital Management, receivables risk, and hedge fund mitigation. There’s a lot of good strategic points here. There was one when I was working with HighRadius and sent this over, they sent this nice list. I want to thank them for the list. They had the last bullet point on there. They said linked to budgeting. You know, it’s that’s not on there anymore. I took that one-off. Okay. The reason why is because I don’t want you to link into the budget because first I don’t believe you ought to be doing it. Okay. Two, I think you ought to be linking it to your plan. You need it to understand and your plan. There was a discussion previously about forecast accuracy. Very important. The further out you go the more uncertain things cancel the less accurate you’re going to be. But you still need to know what your cash flow is going to be because what does that strategic plan rely on? What is the bond rating agency that keeps it? What does it rely on? An accurate forecast of cash? So the most important thing to do is make sure you understand your assumptions and you’re tracking the physical factors that make those assumptions come true. Okay. So critically important. It’s the air we need for survival. Okay, second quarter, let’s jump into the do’s and don’ts, told you first quarter is gonna be quick. All right doesn’t don’t

[8:12] Steve Player
Don’t treat forecasting as a special event. I was very generous in my survey and said who did cash forecasting? I didn’t ask you a lot of the particulars. A lot of people do cash forecasting as a kind of special event. Oh, we can we afford that? Maybe we should do a cash forecast. How good are you? Are you good at the things that you just do occasionally, or as a special event? Welcome to the HighRadius conference here. I know these guys do this regularly. Why? Because there’s an MC for this room. And he’s got a binder that tells him exactly what he’s trying to do. Okay. When you do things on a regular basis, you get much, much better at it. So cash forecasting should be something you’re doing regularly. If you’re not doing it regularly. You’re not doing it very well. Okay, so you got to get into a routine. When you get into the routine, you gotta make some mistakes. That’s okay. As long as you learn from your mistakes. The person who hurts is the one who doesn’t learn from their mistakes. But do it regularly getting a routine. What do we wanna do? Do we want to make it a continuous event? And this is where all planning is going. Not annual budgeting once a year annually. Not occasional cash forecasts and special events. But we get into a routine. It’s like sailing a ship. Okay, we got to do it over and over again. What’s another dumb thing finance does? We’re batch mode people. So about that? I know the manufacturers in the group here. Okay, now you make brand right? Read what you have to do in a batch. Okay. But your production line is continuous, right? They’re always mixing up they’re going to that factory that may run 24/7, you have to get into a continuous flow. Why is management any different? What are we in finance though? We’re the quintessential 1920s people. We’re still in batch mode. We batch everything into a month, we batch it into a set of quarters, we batch those into a set of years. We don’t. We take all our work and put it in big spikes. And they will often stack the spikes on top of each other because we don’t like our family very much. It’s a good way to stay at the office all the time. Business runs of the days when you talk about running lean and efficient. You’re talking about continuous flow. You’re talking about a level, right always want so why can’t we manage on a level basis? And why can’t we plan the same way? Those people who push back on me say, “Steve, we have to have a budget. We love our plans.” And I say “Why don’t you do it all the time? If you love your plans, why don’t you do it continuously?”

[10:46] Steve Player
The answer that is usually because it kills us usually takes us three to six months to do an annual budget. And we couldn’t possibly do that. Okay. I’ve had companies trying to correlate forecasts and taking four months to do one. Okay, if it takes you four months ago. quarterly forecast, it ain’t helping. Okay. So when we talk about getting continuous, we got to get regular, we got to get the light touch, we got to get to where we can do a forecast in less than a week. Okay? My best companies are doing forecasts in about two days. How do you do that? We’ll talk about that later when we’ll have more time. Think about this continuous flow of all my slides. Burn that one into your brain. That’s where you need to go away from the batch mode into a continuous flow. Just like your management team is. Planning should be continuous, cash flow should be continuous. Why do we need a tool like HighRadius? This because we need that automation? We need to always be looking at that. They talked about the previous session about artificial intelligence. Why? Because I want those robots out there looking at all those planning factors. I don’t want to monitor them. I wanted to monitor them for me, and I wanted to just highlight and learn, Hey, that didn’t happen the way you thought. It happened better and happened worse. Okay. Then I want to manage the exceptions. We gotta get out of being data pushers and into continuous managers working the exceptions. Why? Cause’ the exceptions are new information. Exceptions are when something happened differently than what we thought. That requires us to think again, okay? So to get into this to do is to get into a continuous flow. Number two, don’t allow the cash flow forecasting to get stuck in the budget quagmire. Okay, don’t get stuck in the muddy ditch of the budget. Why our budgets such muddy ditches because we tie compensation to them. So everybody wants to negotiate a number that they can easily reach. Okay? What we need to go is to think about forecasting and getting to reality, not tainted by human intervention.

[12:47] Steve Player
So we need to articulate what budgets. Now, most people say budgets do these things. So they set targets in a lot as soon as they agree on actions, allocate resources for day plans that create a budget or a plan and then we control performance. Sounds great, right? So when we talk when we tie compensation to that, what happens is, we take everything and make one tool do all. So what we want to do is we want to think about what we have in that those tools are trying to do, and then pull those apart. And if we pull those apart and think about their separate purposes, what we’ll find is there’s a better way to do everyone. We take your traditional approach to budgeting, forecasting, pull them apart, and separate those into different things, separate your targets and rewards away from your plan, separate your resource allocation away from your reward, measures in control, pull it apart, and then take each one of those things and think about how you can improve them. What do you want your goals to be? What should your targets be at any company, if you’re an investor in the company? What do you think the investors want the goals to be? And what do we want its profitability to be? High or low,? Higher. Reach, Stretch, aspirational. Okay, what do you want your forecast to be? How many want aspirational forecasts? No, we want realistic forecasts. It’s a completely different purpose. When we push those two together, that’s why we have confusion. The reason we blew up so much is we’re trying to do too many things with one thing, instead of pulling it apart and breaking, we can pull it apart. So it gets infinitely simpler. Okay. So forecast, we want realistic, we want rolling use resource allocation. We don’t need to do a budget once a year in advance based on a bunch of assumptions that are going to turn out to be wrong. We want that resource allocation to be real-time. If I’m making bread, and the market in Texas is going crazy for the gluten-free, then I want to be by that plant make more. I don’t want to be constrained. I want to be able to pour more resources, likewise, get something else over here I thought was going to do well. It’s not doing well. I need to take those resources away. So I have them available to shift over. Okay. So resource allocation needs to be continuous and dynamic, based on the plan and the plan is still at the heart of all this. But a different way to think about it. Control. I want to control based on what’s really happening. If I start bleating in performance evaluation with that, then people begin to think, they want to set a control, that’s easy to reach. Okay, so pull this apart. Longer conversation, can’t go in today’s game plan. Number three, forecasting to the wall.

[15:29] Steve Player
Didn’t ask you how far out you forecast. How far out do most people forecast?

[15:37] Steve Player
Cash flows usually three to six months. Budgets plan how far, a year? Always a year? People usually say a year but then I asked the probing questions, “Really, always?” Now we started a year. Now what happens three months and how far do we forecast? Nine months. What happened six months then. Yes, three, six months, three months, nine months and we forecast three, we forecast to the end of the year. That is forecasting to the wall. Okay, when all your forecasts only focus on the year in, what’s the question you’re really asking? It’s not about visibility, because you get proven you don’t care about visibility when you started shortening the horizon. What’s it about when I only forecast the year-end, hitting that budget target, hitting that performance target? And your people are pretty smart out there? They know based on the question what the real question. They know the question behind the question. So if you really care about forecasting, you have to have a consistent horizon. Forecasting the wall is like buying a car. When you get into the car the first night you drive with a funny thing happened. The lights went out 1200 feet but as you move forward, the lights only went drifting. Then you only went 800. 600. 500 and almost at the point of total darkness, they shot out another 1500 feet. Would you like a car like that? But a lot of us have forecasting systems that work exactly the same way. Forecasts need to have a continuous horizon. So that’s what we want you to do. Think about how far you want to go. Okay? In financial forecasting, the norm now is about six quarters. Okay? Why? Because we want to see the full business cycle. So people started with a lot of five quarters. The only problem is, if you notice about that third period, I go out third, five quarters of the third period, I got a third quarter, fourth quarter, I got the first three-quarters of the next one, right? Middle of the summer, people would cheat and say, “Gwen, Give me that six-quarter”, so I can see the full next year, a whole quarter sooner. And once you put six out there, you can roll six, just as easy. You can roll five. Okay, so six quarters is the norm right now. Cash Flow forecasting, how far should you go? Think about that. I’ll come up to that in just a second. Most people don’t forecast cash that far, at least not the same way. We’ll talk about that in just a minute. But keep a consistent forecast around.

[18:01] Steve Player
The fourth point, don’t use drift trend forecasting. A lot of people just say my forecast is just drift or a trend. It is what we’ve done. What we’ve done we’re just going to keep doing, okay. Why is drift trend forecast ain’t it? Because they assume that the river ahead is just like the river behind. Okay, going into 2020 here. What is this river ahead look like this different from the river behind us? Okay, who knows what’s going on in Washington? Who knows what’s going on with currency? Who knows what’s going on with key commodities? What’s all the price on? Simple question. Do you guys want to forecast? What is the price of oil going to be in six months? Y’all come in here and guess it. What do you guys, is that too hard a question for you? I know it’s still in the morning. It was a hard night last night. I’ll make it easier for you. Is the price of oil going to go up or down in six months?

[19:06] Steve Player
Up? We’re all conservative. We’re all gonna say up.

[19:11] Steve Player
The answer is it’s gonna go up down or it might stay the same. We don’t know. If you have somebody that thinks they can perfectly predict the future, travel a commodities bet. If you find them, let’s just put some commodity bets down and go by now, if you had that person you would run it through an operating system. You put that person to buy and commodities. But the problem is there are so many complexities in the world that you’ve got to always be looking. Yes, I want to see the drift to what we’ve been doing. But I want to be constantly thinking about what’s in the case it is going to change that. What’s happening with our customers? What’s happening with our suppliers? What could adjust that drift differently than where we’re trying to go? So what we want to do is we want to develop driver-based diagrams. Okay? This is a big difference. There are some interesting presentations and I don’t ever want to criticize my host. When you just show financial numbers, they assume there’s somebody behind the math. I’m a pretty simple guy. I want to know what’s behind the math. The way you know what’s behind the math is you put together driver-based diagrams. So simply, if as if my finish line is what revenues are going to do, or what cash collections are going to do, what I want to know is all the different things that happened to get to this point. So if I’m trying to collect money, or if I’m trying to build, what is the end goal and what happened right before that? And after I figure that out, then I want to ask what happened before that, and then what happens before that so I’m working from the end game, all the way back to where the process starts. And I’ll show you another example as a light in the presentation. Okay, this is the first play of this, but you want to know all the physical things that happened. Why? Because if I just look at the end results, I get lagging indicators. The more I can build a logic diagram to get back to the front, I am looking for leading indicators. If I get to where I see a leading indicator, then I’m going to go. So I’m going to go into a cash flow forecast out six months, 12 months, far further than we have current orders to tackle what I want to know. Well, I want to know what our order stream is. And I want to know a bunch of stuff way back up in the pipeline. And what we have available today that we didn’t have 20 years ago, is a lot of the data that we want to know is readily available now. Readily available, other systems, it has to be dug out, we have to map it, we have to do a lot of work to see it. But it’s like this room. You realize I’m a jam here, we’re kind of at home, but we’re standing outside in the parking lot. Standing there, we’re being bombarded by thousands and thousands of radio signals. And all you need the right kind of tuner and you can tune it in your car, you put it on if you put it on FM you turn that dial and you’ll begin to pick up music and talk and all kinds of things going on around you that you can hear. You can listen, You can understand you can enjoy you can benefit from. And all you need is a radio receiver. Data, Big Data is exactly the same way. We’re awash in big data that we’re not listening to. Everything I’m talking about everybody talks about big data. We’ve always had big data, we just didn’t have an efficient way to capture it, collect it, digitize it, so we can report it which is just like your radio waves, just washing out there. sales have been going on, right? There are all kinds of customer contacts. That all happened before we have a CRM system to track it. What we got net today is computing power so much we can cost-effectively track it. And so that’s what we’re trying to do. So find ways to build those driver diagrams. I’ll show you this again in the second half. Okay, so half that. I’ve been talking a lot about what questions you have. it gets kind of boring so we are going to jump in there a little bit. Yes, go ahead, Rachel. Got a mic coming for everybody here.

[22:59] Questioner
I think You’ve sort of addressed this a little bit, but one of the big things that people are afraid of is well, where do I manage with if I don’t have the budget? Like how do I, what do I do?

[23:10] Steve Player
How do I manage and you replace it with a plan that you have? You build driver diagrams, and you start trying to document your understanding of the cause and effect in your business. And you start managing upstream. So instead of managing revenue, sales, manage customer contacts, the number of requests the number of orders, get a better understanding of where you are in the business before it converts to revenue. Revenue is a lagging indicator. So understand, apologize to probably get we’re talking in the bread example. They make bakeries. Okay, the bakeries depend on the distribution. So you know, there’s a salesman when I talk to grocery stores, distribution channels, so they’re lining up a whole series of projected demand based on the customer relationships that they’ve built. And based on that, they can study those patterns. And if they get better, they can begin to set it up. Patterns compared to the weather pattern and begin to say, okay, based on this, we get a feel. And that’s what operations people do all the time. They just don’t do it without any financial help. The nice thing about most of these answers exists, we just got to go talk to somebody in operations. We don’t have to figure it out. We just got to be really good at asking questions, and really good at documenting what we find, why do we document it? To make sure we understand it correctly, we won’t adapt, put it down on a piece of paper or a big blank wall, then ask the ops guys to come in. So do we get this right? What’s wrong? And then based on that, what data do we have? And we build our data model. We use our AI to try to figure it out. But when we see the data, we physically see what’s happening. If it was not happening the way we thought, there’s something wrong with our formula. There’s something wrong with the algorithm. That’s it alright, change it change the format, change the algorithm. Keep working it Yes, Natalie.

[24:59] Questioner
Natalie, send someone with flowers, sweets, and…

[25:03] Steve Player
Bread, remember to bring bread,

[25:05] Questioner
Nature’s Own. Better, I can do commercials.

[25:10] Questioner
If you have an FP&A group, and they’re doing what you’re talking about, is do you recommend Treasury involved themselves with FP&A? Or should it be a separate conversation with the same?

[25:26] Steve Player
No, it’s a big job. It ain’t the same thing. You don’t need two people asking the same set of questions. In fact, one of the big things in the FP&A world right now is their group called the Association For Finance Professionals, AFP. AFP is known for its Treasury certificate. Okay. They started out as the cash managers society, they went nationwide, they got a little sexier name, and after producing the Treasury certificate as they tried to expand their logical place for growth was FP&A. Why? Because FP&A overlaps here. It overlaps directly with cash flow forecasting but it overlaps in everything. So team with your FP&A department and go help to work together and build those kinds of diagrams. Other questions? Okay, everybody. Get the popcorn ready for the second half?

I’ll keep going but you gotta keep thinking about your questions otherwise we’ll run out of steam. All right, here we go. Don’t use the same forecast for all purposes. A lot of men and they’re just like me, have you ever done this? You’ve been guilty of this. Can you see the problem? If all we have is a hammer every problem we gotta do we just want to pound it. And there’s so much the time we’re pounded. Do we pound at what’s our hammer in finance? Excel spreadsheets. I know what I need, but I know what I got and I’m gonna head it with what I got. So we’re pounding things with a hammer, that’s your Excel spreadsheet, okay? And it doesn’t matter if we need a screw or a wrench or a drill, we’re going to pound it. Okay? A bad way to do things doesn’t use the same forecast for all purposes. My example is Tw telecom and the meanwhile, my colleague, my Executive in Residence, who’s now my executive back in the field. Basically, you have different business decisions. Forecasts support different business decisions, and those different decisions have different timeframes. Cash forecasting is often relegated to the extremely short time frame. Give me the next three months. Okay, six at the most. We look very short. Why? Because that’s what we can see. Why is that all we can see? Because we’re just looking at the sale. We’re just looking at how many bills we got to collect. We don’t know how many more sales. If I go back to Natalie’s bakeries. Yes, I know I gotta collect. But I also know that those grocery stores get served three times a week, okay? Or maybe five. I don’t know-how. Five times a week we’re out there always. So I know there are more orders coming. So if I go back to my logic diagram, if I have my logic diagram, I can begin to predict in a longer-term cycle, okay? But I don’t need the same accuracy when I get out to three years or five years when I get out to the strategic plan position. I don’t need to know the exact orders. Because the strategic plan is a five-year look. I just need to know the averages. How often is our cash turnover? Okay, so the further out I can look I can make the broader assumptions. The level of detail. When I’m really tight, I usually have a high degree of detail. The further out I go, the more I can use averages, okay. Your short term demand sales and demand forecasting, okay. So people in production who are doing the orders, the people scheduling the bakeries, the people scheduling the orders, that’s usually short term. I have another set of slides, a longer presentation that talks about the difference between that but your strategic plan: Three to five years out. You need to be able to forecast, but not anywhere near the same degree of detail that when I get more time, so use different forecasts for different purposes, okay with the right level of detail. Number six, but use the same update frequency. We in finance, love this. We love consistency. So we’re gonna do everything on the same forecast frequency. I’m gonna do a forecast. That means I got to do everything right? Absolutely wrong. What you want to do is forecast the important things that change a lot, very frequently. This chart comes from Southwest Airlines. They forecast revenue and fuel costs very quickly. Why? Because it’s very important, and it changes a whole lot. Okay, but there’s a whole bunch of other stuff. Things like their labor costs, maintenance, they don’t change near as much. Okay? They do that much less frequently. There are some things like advertising and aircraft ownership, they have huge control over. They don’t update their forecasts maybe once or twice a year. Why? Because they control the decision. Okay? So when you think about it, we have the time to come to my 8-hour forecasting class, I’ll talk about being on a ship. And if we’re on a ship, and we’re about to hit the rocks and crash, does the captain really need to know everything about the ship? The cargo, the manifest? No, they need to know the important stuff about how to keep us alive. So when you do forecasting, when you think about each forecast should focus on what’s critical for this decision, and what’s not. When you take everything and elevate it to the same degree of importance, what happens? You don’t have time. Remember this number, not one random. 168. And you might tell me the importance the number 168

Everybody in finance, everybody in this room, everybody in the world has 168 hours a week. That’s all you have. No matter how much you spend with your family, no matter whether you bathe or don’t bathe. It’s 168 hours to get it done in, okay? When you take your task and elevate stuff, that’s not important. It crowds out the time you could be spending on stuff that is important. So if you want to stop doing dumb stuff in finance, find out the stuff that shouldn’t be up on the top of that list and do it much, much less frequently. Okay, you only have so much time, if you elevate everything to the same importance. you negate your capability of focusing on what’s really, really important. Okay? Okay, so again, chart grading. We go a lot more into that, but there’s time I’ll keep going. Don’t fall into the trap of forecast accuracy. How is a forecast accuracy sounds so important, when in finance isn’t accuracy, important.? Not really. Not in this regard. Why? Because most of us don’t understand what forecast accuracy really means. Okay?

[32:07] Steve Player
What is the act of forecasting according to you?
If we were on that day-long journey with me and I hope all of you will sign up and come, let me teach sometimes cause it’s very interesting. When we’re in that ship situation where we’re about to hit the rocks, and we’re trying to help our captain avoid the rock. If I were to forecast and the captain if I were to tell her Hey, Captain, we’re gonna hit the rocks. And then through work, diligence and luck, we miss the rock.

[32:42] Steve Player
Would I have delivered an accurate forecast?
Yes, I would have delivered and no, we wouldn’t have been accurate because we missed the rock. But the whole point of the question, what’s behind the question is why do we think forecasts, some people are under the delusion that we forecast to be accurate. That’s not at all the purpose of forecasting. What’s the purpose of the forecast? What’s it? To make better decisions, we forecast to know if we’re on a course that is going to cause us to hit the rocks. Let’s understand that and do whatever we can to miss the rocks. So the purpose of forecasting is to inform your management team of a problem or an opportunity, and then, therefore, take a course to seize that opportunity or avoid that problem. So the whole purpose of forecasting cash or otherwise is to make better decisions that lead to a better outcome. Okay? If the forecast says we’re going to have a bad outcome, by all means, don’t try to prove it by being accurate. Take action to move. And so when you take those actions to move, how you are going to measure forecast accuracy. Okay, don’t get me wrong and in the book, in Future Ready, Steven I talked about this we changed and used a different word. We talked about forecast reliability. Everybody should be measuring their forecasts. But what you’re looking for is to see if your forecasts contain any bias. Okay? The two most common measures of forecast accuracy, average net error, average gross variations. Average net area, our objective was to be less than 1% off. In this actual case of data I’m about to show you, we were at point eight, we look good. Except for the second-half average gross area, the variation you need to be less than plus or minus 5%. Okay, we’re out here at plus four and 14. So we got a problem. Whenever you have a problem, you dig into it. This is our actual data set. When you look at that data set, what does it tell you? This is my simple statistics in two minutes or less, okay, it’s all you really need to know. In a normal situation where you have random variation, how often would you have four data points in a row, above the line or below the line? Okay, you know, random variation, what happens? It’s above below, above below, above above, above below. It’s some kind of random pattern. And it’s highly improbable that you’re going to get four data points in a row, either above or below the main. Okay? That’s a clear sign of bias. What biases are forecast? When I’m forecasting for the wall, what’s biasing the forecast? The question managers are really asking. They know as anybody said, you delivered a forecast and somebody says that’s just not good enough. That’s a set forecast is not good enough. You have been told that. Okay, my forecast is not good enough. What does that mean? That means it’s not what management wants. And that’s what creates the bias is when we begin to overlay the management wants or somebody trying to sandbag or somebody trying to use a budget, you got to get the human intervention out. Okay. I can measure forecast accuracy with only tracked the things that we can’t manipulate and control. Okay? So look for signs of bias. If you see this, then you have a problem. So keep that in mind. Okay, that’s enough into statistics. Number eight, don’t rely on spreadsheets for rolling forecasts. Okay. I was asked this question last night. What do you think about using an Excel spreadsheet? Excel spreadsheets are a tremendous personal productivity tool. The minute you interject the second user, you have exceeded his capacity. From a control point of view, you’ve dramatically exceeded his capacity. It’s always like these little examples here. Where’s a better customer list? I didn’t know At 2 pm, not the one at 1;55. “Is it the one-nine final?” “No, it’s nine-nine final.” “Nevermind, I’ll send you another one.”

[37:10] Steve Player
That to me, that little trail of text conversation is the epitome of what’s wrong with Excel spreadsheets. It’s not a controlled environment, you’re in for trouble at some point in time, whether it’s big or little. Don’t use spreadsheets for this, you need a purpose-built tool. The good news is you’re at a conference with a company that sells a purpose-built tool. So HighRadius, we have people that think about control, think about versioning, think about all these things. And we’ll talk a little bit more about that in the event session. So think about getting yourself a purpose-built tool to have what you’re trying to tap. Okay, on in the fourth quarter. Actions to win. How we are doing on time. Okay. You didn’t give me the eight-minute sign. Yes. Okay. We’re good. Okay. All right.

[37:54] Steve Player
Actionable forecast. OODA loop. Can you back me up with this concept the OODA loop? Terms on observe, orient, decide and that. Boy was an Air Force Colonel and he was given an assignment. When the US went into the Korean War, they had a very difficult challenge. The challenge was, as they came into it, you look at our fighters compared to the big fighters on the other side, you had a real challenge in that. Basically, the time decides versus the time. Our fighters looked like we’re going to get killed. But reality our planes are pilots shooting down their planes about 3 to 1 to 5 to one. It didn’t take very long before the enemy. When we showed up, they needed to get out of the way or they were going down. Boy trying to figure out what caused that to happen. And what he found was the aeroplane. The canopy had a better field of vision. Their pilots going into battle could see what was happening much quicker. Our pilots were much better trained. So they not only could observe What was happening, they were trying to orient themselves to what it meant, and what they should do about it. And because of that, they were much quicker to decide what to do. And then to take action. Okay, so the OODA loop describes that observe, orient, decide and act. And that’s what you’re really trying to do with your forecast is trying to get that situation where you can go faster. And while I’ll submit to you is the company that can make that loop tighter, makes decisions far quicker. And if you’re doing things quicker, you can be a big guy with a heavy puck, but you got a little guy that can hit you three times before you can launch that big but I’ll put my money on the little guy. Okay. So speed, the ability to act quickly in today’s world, to be agile and to adjust is what we need to focus on. So in terms of accelerating your game, thinking about how I do cash forecasting, not in batch mode, but on a regular continuous basis where I can always adjust and update. That’s where we’re trying to go. Okay, so get predictive. This is the same logic diagram I showed you earlier, but it’s filled in more like a pipeline. So I’m trying to make revenue happen down here. What do I gotta do to do that? From the point, it gets released to the sale, all the way back to grow sales? How do we make growth sales? I work it through the sales pipeline, the sales calls and so forth. I work that back up into the marketing department, where the leads, how they get into sales, how to take get in the market, all the way back to where the barring the customer universe, with advertising media. Okay? How do I pull all that through?

[40:35] Steve Player
Once I have that picture, then I can begin to put algorithms I can look at all kinds of metrics, and I can begin to predict when stuff happens up there. How long does it take to run down through the waterfall to get to where I am? When I see problems up there either floods or droughts, I know in advance how they’re going to affect us. That’s what makes you more agile. You can see it, you can observe it, you can orient yourself to it faster. So get predictive when we talk about going from descriptive analytics and look back all the way to prescriptive, these are the diagrams you got to have to get for swift prescriptive. You have to see and diagram what’s gonna happen. You put these diagrams together it’s easy for data scientists to pull that in and begin to start to work with it so make it visible.

Be more strategic. you got to quit being the data clerks. Or as I like to describe some FP&A functions, the data monkeys. You ever saw that commercial where Bob goes in there’s a monkey throwing paper everywhere. I think a lot of finance shops so that way we’re throwing paper everywhere. And we’re trying to gather it up making sure we’re using the right Excel spreadsheet. We gotta get away from that we got to become more strategic. We got to stop doing dumb stuff to free up our hundred and 68 hours. So we have time to be more strategic in terms of what’s out there. And then we got to get very proactive. We got to plug into artificial intelligence and this is actually from HighRadius. How do I begin to use artificial intelligence? These computers can do a lot of monkey work, they can do a lot of manual tasks, they can look for a lot of things while we sleep. Literally. And you can come in and work the exceptions you can come in and you won’t lose your job. If you’re using your brain, you will lose your job if you’re just being a clerk. Hard jobs are going to be in limited supply, brains will always be needed. So focus on the diagram focus on understanding those things and what you can do to manage those exceptions. That’s where we’re trying to move to in terms of what’s here. Okay, two-minute drill. Let me stop here and get in some q&a and I’ll take you through the two-minute drill with about two minutes ago. I’ll run you through a containment drill, just really a recap. What other questions do we have?

Up here, got one here, one here.

[42:50] Audience
For an exec team that really puts a lot of weight behind these forecasts and for us, cash burn is really important. So it seems like we’ll give an unbiased forecast. But they’ll say, well, it doesn’t match our cash burn. How would you go the next step and kind of ease them into getting away from the bias?

[43:14] Steve Player
When it says doesn’t match our cash burn? What does it mean?

[43:17] Audience
So we would create a cash burn or forecast.

[43:21] Steve Player
Are they burning faster or slower than the forecast?

[43:24] Audience
It varies.

[43:25] Steve Player
Okay. So then what I’ve tried to do in that situation is they’re saying that doesn’t match something, then I get you almost have to get detail, You’re forecasting here, the burns here, begin to just track what’s happening differently than what you thought was going to happen. And how much of the burn is in their ability to manipulate. So for instance, I can hold back on when I release checks, you know, I can defer. I’m supposed to play on Friday. I’m gonna skip that then another week. Now, that’ll have ramifications down the road, but there are parts of that you can hold on other parts. You can. Yeah, the cash is coming in. You could get stiffed just as easily so you have to kind of break that down into kind of what’s happening, but try to get it as fat base as possible. What you’re trying to do is get the reality to seep in based on what’s really happening. And identifying actions you can control and can’t control. And then there’s tracking those. And then you that’s when you get to perhaps a daily sheet that says, okay, that’s supposed to be here. What I envision us getting the point of the building when we get our official toes, really in there is where we know customer by customer. We know when these customers pay us. And we know they pay us on this regular pattern. And when that pattern is disrupted, something’s disruptive to that customer. Maybe mine or that they have a new AP clerk or something happened. Maybe they’re getting into trouble. If we know that before everybody else knows that we know that maybe we need to be a little pattern on the credit with those guys. So that’s where you want to get to where you go to the mass for into what’s really happening and then now ultimately, each individual customer but getting senior management to be real, is a challenge group is a delicate art if you’re gonna do that without getting fired.

Or always have your Well, big in or you’re gonna go next.

[45:01] Audience
Yeah. So, a very interesting point about the forecast accuracy versus forecast reliability. So, usually, when the company is trying to drive cash forecast improvement, you know, there’s investment resources you know, both from you know, process people and beta people and you know, they exactly always are looking for what is my align this right. So, how do you suggest as, you know, the team to the project in to quantify? You know, the, return on spending all these efforts improving, you know, like, if forecast accuracy is not the best way to quantify it, then how do we do that?

[45:41] Steve Player
What does forecast accuracy do for you? Forecast accuracy in itself does not do anything for you. It’s what you do with knowing that does something for you. So for instance, if I know the accuracy of my demand pattern, I know how much safety socket inventory I need to build, okay, if I can make those windows hotter, I don’t need as much safety stock. So I can reduce working capital by actually shrinking the safety stock. So you got to get behind. When I talk about forecast actors, and you got to get behind that into what that means to us in terms of the action we’re going to take. Your return on investment always comes from actions you’re going to take, collecting faster, paying slower, negotiating better terms, so drive it past. Just accuracy into the action that you’re going to say. Good.

[46:34] Audience
I have a second question and it’s about the king of prescriptive forecasting in the longer term, you know, starting from the sales opportunity all the way transferred to shipment plan. And so could you elaborate more about how would the AI leverage that information to drive more long term forecasts? I think I get I’m pretty clear about the short term right that using the historicals. Using the forward-looking data from cells to translate that into cash forecasting,

[47:05] Steve Player
Okay, I’m going to implement a new price increase. What percent is going to stick? I have estimates of what’s going to stick. Once I end up getting to see where that’s going to happen, then I can monitor a campaign to see how it’s happening. We’re announcing to customers, we’re having negotiations, what’s the rate of it actually sticking? Okay, we thought 80% would accept the increase. When we start our first set of hundred customers to test that, are we seeing 80%? So I can begin to experiment more because I understand the full algorithm. And the more I can validate that what I think’s going to happen is happening, the greater assurance is going to come through that pipeline. This diagram is very, very powerful if you can build it for your company because again, you get out of being just fine. It’s down here in the blue, and start getting way back in there and you begin to see when the new products come in when new things come in. The longer that leads time is the more you can validate whether the assumptions that go into creating the plan are actually happening the way you thought they’re going to happen. And they can happen better or worse. It’s not all just downside. Sometimes the product can come in and it’s coming gangbusters. So you know, you’ve got an opportunity if you can shift the resources up to support that kind of effort. Let me wrap up real quick here because we’re about out of time. In the two minute drills. There are the dos and don’ts. The recap there, they’re in your slides, you got them to take with you. I won’t repeat those who spend a lot of time going through those. But for every don’t, there’s a what you should do instead. But when you find you’re doing something wrong, ask your question, what should I do instead that might be better. You’ve got my contact information in the Future Ready books up or if you want to take a look at that. If you need an assessment of where you are and where to go. We can come in and help work with your team, create a roadmap both for your team development as well as what’s happening. But thank you, we appreciate you coming.

[0:00] Anchor: So thank you for joining today’s session. On the best practices of the cash forecasting, we have with us Steve Player, owner and managing director of the Player Group. Steve has over 30 years of experience in improving performance management. He’s the co-author of ‘Future Ready: How To Master Business Forecasting And Beyond Performance Management’, as well as five other books. And we have Munish Balyan, ABB Product Management Treasury from HighRadius. And I would like to say that we have Charity over there. She’s going to circulate a signboard. If you want to gain one credit for CTP recertification, please fill up your name and email address and also we’ll be able to give you the presentation slides. So please do not forget to write your email address on that. Okay, so Steve and Munish welcome. And the stage is all yours. Round of applause, everyone. [1:06] Steve Player Thank you very much. Thank you very much. I really appreciate the Round of applause. You guys know you sure you’re the right session. Okay, did you leave your preconceptions at the door? Because we’re gonna challenge a few things here today. Okay, this is the dos and…

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Steve Player, Owner of the Player group would be highlighting the commons mistakes which corporate treasuries commit when they forecast cash and the best practices which they must employ to improve the process

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