AFP Blogs

The biggest mistake corporate treasury and finance professionals make when cash flow forecasting? “Not making clear the operating assumptions that drive the financial valuation, and then not monitoring the realization of benefits during the integration of the business over time,” says Henry Osti, managing director of Osti & Associates.

Osti, who will speak in AFP’s Advanced Approaches to Valuation Incorporating Unique Cash Flow Risks Webinar on Jan. 7, 3:30 pm ET, says valuating a business is especially difficult today. “The factors that drive the value of a business including cash flow, risk and financing, have all been tremendously impacted by the recent changes in the economy,” he says. “It is critical to understand how to model the impact of these factors in mergers, acquisitions and business valuation.”

Also speaking in the Webinar:

• Danny Huff, EVP & CFO, Georgia Pacific
• Fred Ryder, Senior Vice President, Corporate Strategy and Development,
  Blue Cross and Blue Shield of Florida
• Doug Cox, CFO, Arkema

The Webinar will cover:

• The techniques for valuing a business
• Benefits and disadvantages of valuation techniques
• How to rank order business value drivers
• How to apply risk-based techniques in valuing a business
• How to value business synergies in a fact-based manner
• Determination of specific factors that drive business value
• How to make projections for business value drivers in uncertain times
• Risk-based business valuation using Monte Carlo methods.
• A case study of Georgia Pacific’s acquisition analysis.

Corporate treasury professionals and financial institution executives alike will learn critical forecasting techniques at AFP’s Cash Flow Forecasting seminar, October 27-28, in Tampa. Attendees can receive up to 11 CTP/CCM credits and up to 11 CPE credits.

Attendees will learn how to:

• Identify cash drivers in their organization
• Forecast individual cash flow line items
• Cope with cash flow uncertainties—both on-going and one-time events
• Predict year-end cash balance, and reconcile it to the short-term cash forecast
• Perform and interpret cash forecast variance analyses.

Take-aways include:

• A reference guide to selected cash flow forecasting techniques
• Selected exercises with additional practice examples
• Excel templates.

Seminar leader George Schilling, CTP, is principal of Schilling & Associates, a treasury management training/consulting and a former assistant treasurer of Chevron USA. Schilling offered this cash flow forecasting tip:

To ensure the effectiveness of your cash forecasting effort, create a cash forecasting policy that answer three questions:

• What are the financial benefits of cash forecasting to our company?
• How do we evaluate what constitutes successful cash forecasting?
• Who is responsible for the cash forecasting activity?

To optimize your variance analysis activity, define what constitutes an accurate forecast by establishing an acceptable error tolerance bandwidth (e.g. plus or minus 10 percent). Once this benchmark is established, only variances that exceed it are investigated thus reducing the administrative cost of the cash forecasting effort.

Register for the seminar here.

Firms that require cash management training for new treasury employees or experienced colleagues outside the treasury department have the perfect resource: The AFP Learning System™: Cash Management Seminar. The online course is set for October 19 and 20, 1-5pm ET each day. Attendees earn up to nine CPE credits. Register here.

Objectives include:
• Recognize key concepts, terminology, goals and tools used in the management of corporate cash
• Examine the cash conversion and operating cycles, and methods used to forecast cash flows
• Identify basic borrowing and investment techniques used to ensure adequate liquidity.

Who should attend:
• Anyone interested in learning the fundamentals of cash management
• Practitioners who have joined the treasury profession within the past two years
• Financial professionals who require a refresher on cash management
• Individuals responsible for cash management in their organization
• Bankers and other providers who make referrals to the product sales team or provide customer service
• Operations and technical staff who support cash management systems and processes
• Accountants and other finance staff who interact with treasury staff.

Feedback from graduates
Here’s what Key National Bank employees said after attending:
• 90 percent said the course enhanced their cash management knowledge and skills
• 100 percent recommended the course to colleagues.

Treasurers and CFOs, take note: Jim Poad of Advantage IQ lists four utility budgeting myths to avoid:

Myth #1: Budgets can be easily set based on the A/P costs from the prior year.
Reality: In doing so you make assumptions about your general ledger that probably are inaccurate.

Myth #2: Energy can be accounted for like any other expense.
Reality: Unlike other operating expenses, there are many variables and much fluctuation in the world of energy and energy providers.

Myth #3: Variances can be reported and analyzed in terms of dollars only.
Reality: Cost provides little insight into what is driving the actual variance from month-to-month and year-to-year.

Myth #4: Variances are only useful for managing up in the organization.
Reality: While it is true that there certainly is a managing up side to variance analysis, it is also important to use for managing down.

Learn more from Poad in the upcoming issue of Risk.

Global Capital Markets 

Oracle Corp., the world’s second- largest software maker, sold $4.5 billion of debt in a three- part offering, to finance its proposed acquisition of Sun Microsystems Inc. Oracle issued $1.5 billion of five-year, 3.75 percent notes priced to yield 120 basis points more than similar-maturity Treasuries, $1.75 billion of 10-year, 5 percent debt at a 155 basis-point spread and $1.25 billion of 30-year, 6.125 percent bonds at 185 basis points.

Citigroup Inc. sold $5 billion of notes guaranteed by the Federal Deposit Insurance Corp. in a four-part offering, as competing banks seek to reduce their dependence on government backing. Citigroup issued $1.75 billion of two-year, 1.5 percent notes that priced to yield 41.4 basis points more than similar- maturity Treasuries; $750 million of two-year debt that floats at the three-month London interbank offered rate; $1.75 billion of three-year, 2.125 percent securities that paid a spread of 55.1 basis points; and $750 million of three-year floating notes at 5 basis points more than Libor,

Time Warner Cable Inc. sold $1.5 billion of 30-year bonds. The 6.75 percent debt priced to yield 260 basis points more than similar-maturity Treasuries

MetLife Inc., the biggest U.S. life insurer, sold $500 million of junior subordinated notes in the industry’s first public offering of hybrid debt since June 2008.

Sirius XM Radio Inc., the satellite radio company that averted bankruptcy this year, and Spanish language broadcaster Univision Communications Inc. led $2.4 billion of high-yield, high-risk bond sales this week as borrowers seized on a junk debt rally to extend maturities.

JPMorgan Chase & Co., Citigroup Inc. and Ford Motor Co. led companies selling more than $18.1 billion in bonds backed by consumer debt in June, the most since May 2008, according to Barclays Capital, as borrowers take advantage of cheaper funding. 

U.S. Treasuries 

The Treasury will hold four auctions next week for the first time to sell $73 billion of notes, bonds and inflation-protected securities as the U.S. accelerates debt sales to finance a record budget deficit. 

Commercial Paper Market 

The U.S. CP market contracted in the latest week to the lowest in at least 8-1/2 years as the painful economic downturn and aftermath of the credit crisis continued to erode it, Federal Reserve data showed on Thursday. For the week ended July 1, the size of the U.S. CP market fell by $18.1 billion to total $1.136 trillion outstanding, down from $1.155 trillion the previous week. That’s about half its size nearly two years ago, as the market peaked at about $2.2 trillion outstanding in August 2007 when the credit crisis broke out.

Asset-backed CP outstanding fell by $13.6 billion after falling by $21.3 billion the previous week. Unsecured financial issuance outstanding fell by $3.2 billion after rising by $18.2 billion the previous week. 

LIBOR 

The cost of borrowing in dollars for three months in London dropped below 0.6 percent for the first time as central banks offered cash to financial institutions and signaled interest rates will stay at record lows.

The London interbank offered rate, or Libor, that banks charge for three-month loans fell half a basis point to 0.58 percent, according to the British Bankers’ Association, taking its decline this year to 85 basis points. The rate, a benchmark for about $360 trillion of financial products around the world, peaked at 4.82 percent on Oct. 10 following the collapse of Lehman Brothers Holdings Inc. on Sept. 15.

The Libor-OIS spread, a barometer of the reluctance of banks to lend, stayed at 36 basis points today, down from a peak of 364 basis points on Oct. 10. The spread, the premium banks charge over what traders predict the Fed’s daily effective federal funds rate will average over the next three months, averaged 26 basis points in the five years before the start of the credit crisis in August 2007. 

Credit Ratings 

The ratings on $235.2 billion in debt backed by commercial mortgages may be cut by Standard & Poor’s as it seeks to reflect how the securities would fare in an “extreme economic downturn.” The possible reductions, disclosed today in a report, follow S&P’s May 26 statement that the ratings of as much as 90 percent of top-ranked commercial mortgage-backed bonds sold in 2007 may be cut because of the changes in how they’re assessed.

If the securities backed by hotels, shopping centers and offices lose their top-ranked status, they’ll be excluded from the Federal Reserve’s $1 trillion Term Asset-Backed Securities Loan Facility, a setback for the government’s efforts to jumpstart lending. S&P expects to finish the review of the debt over the next three to six months, the company said. 

FED 

Commerzbank AG, Germany’s second biggest lender, will drop out of the list of securities firms that trade government bonds directly with the U.S. and U.K. Treasuries to focus on continental Europe after the takeover of Dresdner Bank AG. Dresdner’s withdrawal comes as the U.S. Treasury sells a record amount of debt this year and the central bank buys government debt for the first time since the 1960s in an attempt to drive consumer borrowing costs lower.

The bank is the second dealer this year to resign from the Fed’s network of firms which was formalized in 1960. The dealers are mandated to bid at Treasury auctions and that act as counterparties for the central bank as it conducts open-market operations. Commerzbank’s decision brings the dealer network back to 16 firms, according to the Fed, the smallest in the 49- year history of the system. 

Banking 

Five U.S. banks with total assets of about $1.04 billion were seized by regulators, pushing this year’s tally of failures to 45 as a recession drives up unemployment and home foreclosures. 

Advanta Corp., the credit-card lender that shut down its small-business accounts, was ordered by regulators to plan on halting bank operations and pay customers $35 million because of allegedly “unsound” practices.

Here’s a surprise: in a new McKinsey survey, consumers say merchant acceptance and preference is a top driver in the usage of use of debit cards. “Consumers understand that you pay high fees for processing credit cards. They’re pretty sophisticated. You have a really significant influence over the way consumers can pay. Prompting does not drive consumers away. They understand it and they respond to it.”

Stewart concluded with some forecasts: Debit card and ACH growth will slow through 2012. We’ll continue to shift from check conversion to RDC.

Three more implications for corporate treasury:

Anticipate and adapt to ongoing liquidity constraints.

Continue to seek efficiencies in AR/AP.

Anticipate customer impact from reduced access to credit and manage the POS experience. “We’re seeing increases in alternative credit providers like Bill Me Later.

The changing landscape has accelerated market consolidation so Stewart believes we will see more stable and scale-driven pricing. The price of ACH origination and so on will continue to fall. The top five banks – J.P. Morgan, BoA, Wells Fargo, Citi and PNC account for 37 percent of domestic deposits.

As for maturation of the electronic payments market, image exchange is here, Stewart said. It’s allowed for product innovation and what Stewart has seen remote deposit capture emerge. “Suddenly the economics of RDC make sense.” It reduces costs and streamlines the payments process and it’s fueling competition among the banks. It’s allowing other banks to poach because it blows away the “footprint parameters.”

We are very likely to see incidents where consumers will be declined rather than use overdraft protection. “What are you going to do about that? That’s a significant experience that needs to be managed to maintain customer loyalty but also an opportunity to steer them to other options.

On the regulatory front, the Fed proposed changes to Reg AA and Reg Z (Truth in Lending), which restricts lenders’ ability to re-price for risk. “We think what issuers will do is contract the amount of credit and push out certain subsets of consumers. This is a pretty transformative shift in the use of credit, including subprime borrowers.”

The Fed is also trying to amend overdraft regulations. Reg DD Truth in Savings will change on Jan. 1, 2010, to improve consumer disclosures about overdraft fees. A proposed change to Reg E for EFT would require consumers to opt-in on overdrafts and significantly impact the amount of fees banks could get from them and change consumer behavior at point-of-sale.

Stewart outlined the five trends affecting the U.S. payments landscape: the recession, retreat from risk, more regulation, more competition and a maturing electronic payments market.

The recession underscores the need for operational efficiency. “This is not a cheery presentation, by the way,” Stewart said.

Consensus among economists is that stimulus has helped but it hasn’t helped figure out if there’s a market for this year. For payments, they don’t know if they can reissue bonds.

“We’re seeing and hearing this anecdotally from the banks if that you want credit you’re bringing deposits. Anticipate higher fees than you might have normally paid.”