Treasury Departments Need Not Yield to FP&A in Forecasting
In recent years, CFOs have placed greater emphasis on strategic cash forecasting, yet in practice many companies allocate long-term forecasting and corporate modeling to FP&A, with treasury handling only short-term cash forecasts. During the early pandemic, FP&A gained more influence due to responding to investor demands, but treasury holds unique advantages in accuracy and future orientation. Experts suggest that treasury should proactively seek involvement in strategic forecasting, use tools like AI and APIs to extend forecast horizons, and collaborate with FP&A on division of labor to jointly enhance forecasting value.
Editor's note:Bob Stark is the global market strategy lead at treasury management software companyKyriba. The views expressed in this article are solely those of the author.
Over the past few years, CFOs have placed increasing emphasis on strategic cash forecasting. However, although one might assume this means treasury will be more involved in corporate strategy, what we hear from many clients is quite the opposite. Finance leaders are leaning heavily on financial planning and analysis (FP&A) teams, while treasury is being excluded from these discussions and asked only to oversee short-term cash forecasting.
"I see many companies moving long-term forecasting and corporate modeling into the FP&A function—even creating new departments for it—leaving only short-term cash forecasting to treasury," says Jim Gilligan. He previously served as assistant treasurer at Evergy, a Kansas City, Missouri utility company, and is now senior vice president at MFR Securities.
Why CFOs are turning to FP&A
The shift by CFOs toward FP&A stems largely from the turmoil many businesses experienced in the early days of the COVID-19 pandemic. Financial leaders broadly needed more forecasting, scenario planning, and stress-testing information, and relied extensively on FP&A because investors and shareholders demanded answers.
"Treasury was busy dealing with the next few quarters, ensuring covenant compliance, handling PPP loans, meeting with banks to keep credit lines running, and ensuring cash inflows," says Lee-Ann Perkins, assistant treasurer at Specialized Bicycle Components.
Industries hit particularly hard by the pandemic—such as hospitality, airlines, and restaurants—are likely to rely heavily on FP&A. Beatriz Saldivar, global payments and treasury advisor at Kyriba, says these industries had to rethink their business models to survive.
FP&A may also be able to take on this role because that department typically has easier access to the CFO than treasury does. "They are the ones who report to the CFO and are involved in developing outlooks and long-term perspectives," says Enrique Calderon, a former assistant treasurer who now works as a treasury and cash management consultant. "I have witnessed this firsthand."
Additionally, treasury faces difficulties in obtaining valuable long-term information, while FP&A has fewer such issues. Calderon notes that FP&A has closer ties to the financial control function, which handles operational front-line matters, so FP&A often gets the information it needs more quickly. "When someone from FP&A calls, everyone responds immediately," he says. "They are also involved in the annual budget process, which provides additional influence."
Creating opportunities
Although the pandemic is far from over and market volatility persists, the initial panic in many organizations has subsided. Companies can therefore take a more deliberate approach to strategic cash forecasting and involve treasury in the process.
That said, treasury should not wait to be invited. Instead, they should proactively reach out to the CFO and FP&A to request involvement in the strategic forecasting process. They should be confident in their track record of reliability.
Treasury has a strong record of creating accurate forecasts—in some respects even better than FP&A, because FP&A typically conducts assumption-based, top-down long-term forecasts relying on different data sources. Treasury should seek opportunities to collaborate cross-functionally with FP&A to contribute to these 12-to-18-month forecasts, thereby solidifying its position as a strategic contributor.
This is an opportunity for treasurers. In my experience, treasurers' 13-week forecasts are often highly accurate. Treasury can extend this expertise to 6-to-12-month forecasts.
However, doing so may require treasury to adopt new tools, including artificial intelligence (AI) and application programming interfaces (APIs). These tools can quickly gather large amounts of data, enabling treasury teams to rapidly build global cash forecasts and extend the accuracy and time horizon of their forecasts.
Moreover, treasury is well suited for strategic cash forecasting because the function is more focused on safeguarding the company's future, says Lee-Ann Perkins of Specialized. "When setting up new subsidiaries in different countries, we handle cash requirements and funding needs," she says. "FP&A typically forecasts future demand based on historical scenarios, while treasury typically forecasts funding needs for a future state."
Jim Gilligan of MFR Securities adds that treasury is more familiar with the overall funding plan and associated costs. In contrast, FP&A needs to obtain this information from treasury to perform its modeling.
Working together
Perkins suggests that treasury and FP&A teams divide the work; rather than having one side handle all strategic cash forecasting alone, each should take responsibility for areas where it has strengths.
Treasury should handle forecasting for collections, payments, and strategic M&A. Depending on the type of company, treasury may also take on free cash flow forecasting. Meanwhile, FP&A can handle scenario analysis and regression analysis to predict changes and patterns.
But more importantly, the two departments should work together rather than in silos, Perkins says. "FP&A is a department we should collaborate with frequently and closely," she says.