Insight to All Things Currency and Treasury Management

By Malcolm Cummings
Managing Director of Product Management, FiREapps

Here at FiREapps, we have a simple definition of lean. Lean is the identification and systematic reduction of waste in a process to maximize value. How do we define value? Well, value is defined as an action or a process that someone is willing to pay for. Quite simple, really. So, when designing our new cash flow exposure management product, for every step in the process, we identified what added value and sort to remove everything else. There are six steps in the process of cash flow forecast exposure management:

Step 1: Forecast Initiation

The first step is forecast initiation. During this step, waste is reduced through consistent reference data, consistent rates, creating a baseline, and controls and compliance.

Consistent Reference Data. Consistent reference data ensures the definition and management of periods, categories, organizational units are consistently applied across the organization.

Consistent Rates. Having a central management of rates apply to the forecast is going to deliver value. Everyone is working to the same rates. These rates can be budget rates, spot rates, forward rates – as long as they are consistently applied.

Baseline. Systematically creating a baseline means everyone starts from a single version of the truth. No wasted time finding that excel spreadsheet. No digging through file folders, phoning people figuring out which version to start with.

Controlled & Compliant. We’ve designed a workflow which has specific calls to action. No wondering whether it’s time to start, no wondering what step you are in the process. A call to action can be an email or an SMS — it’s all available. It’s controlled and compliant.

Step 2: Forecast Capture

The second step is forecast capture. Waste is eliminated at this step in the process through entitlements, auditing, variance analysis, and process monitoring and tracking.

Entitlements. Having fine-grained entitlements to ensure compliant visibility and people can only see the data that they’re authorized to see is really important and quite tricky to do in a spreadsheet.

Audited. Knowing who changed what, where, and when — really important when you’re stepping back to understand who changed forecast and understanding why they changed the forecast. It’s a really good learning tool.

Variance Analysis. Variance analysis gives you real-time forecast-to-forecast variance. You need to try and remove those fat finger checks. Someone has typed 10 million instead of 100,000. You would want to spot that straight away. Again, reducing that waste of trying to undo the mistakes a day, a week, three months into the future.

Process Monitoring & Tracking. Tracking those submission of the forecast as they arrive and giving real-time alerts to insure that material gaps aren’t actually in your forecast. Especially when you have lots of forecasts.

Step 3: Forecast Analysis

Step three in our process is Forecast Analysis. Here, consolidation and variable analysis and analytics are key in waste reduction.

Consolidation. The ability to consolidate multiple forecasts with a simple click. Lots of our clients spent many days, sometimes weeks, consolidating their forecast with a Control-C/Control-V — copying various spreadsheets from various formats. Very time consuming, no value there, a lot of waste.

Variable Analysis & Analytics. When you have consolidated that forecast, the ability to slice it and dice it in any way that you require. Not just a canned report, but getting access to data– it may be by category, by currency pair or by organizational unit. And having forecast-to-forecast variance is a great tool for companies to learn how their forecast is evolving over time. It’s a great training tool.

Step 4: Exposure Analysis & Reporting

Exposure analysis and Reporting is the fourth step in our process. During this step, automated tools are used to identify process or policy breaks and a flexible exposure analysis are instrumental to further eliminating waste.

Automated Tools to Identify Process or Policy Breaks. Our clients appreciate more than just canned reports. We look to put the power of analytics in their hands. Our focus is to improve forecast accuracy and the timeliness of getting that forecast and then accelerating the speed that our clients get to the value. Connectivity to TMS’s and Hedge Accounting Software. We take care of all of the translation further reducing those time consuming, manual processes. Again, getting rid of that waste that is so important when we’re talking about lean principles.

Flexible Exposure Analysis. With a focus on value, we looked at the timely, accurate, and confidence that our clients could gain in forecast data. Once clients have that, we don’t stand in the way of sharing that value across their organization and their system landscapes.

Step 5: Hedge Strategy and Decision-making

Step 5 applies lean principles through flexible definition and systematic and auditable features.

Flexible Definition. We’ve systematically created hedges based on a client-specific hedge strategy. That strategy can be defined by category, by entity, by currency or even at the organizational level. Having all of those levers really does add the value in applying that hedging strategy to your exposure that clients are confident with.

Systemic & Auditable. The systematic and auditable features that we’ve talked about earlier on in the process. Again, who is approving the hedges? Who is approving the forecast? Everything is auditable, and again that is really helpful to understand how a forecast has evolved over the various months, quarters and years.

Step 6: Trade Calculation & Execution

Finally, trade calculation and execution should be flexible, systemic, auditable, and be part of a straight-through process.

Flexible, Systemic & Auditable. This includes systematic creation of trades based on client-specific parameters and the ability to determine the destination of those trades — whether they’re aggregated or netted across a category or at the company level. There’s also systematic creation of the back-to-backs so we can start tracking a netted trade and where it came from. We look to eradicate all of those cumbersome, time-consuming and error-prone manual processes.

Straight-through Processing (STP). Once we have those trades, why download them into a spreadsheet and then manually upload them into the trading systems? There is no chance of error with STP.

After this 6-step process of cash flow forecast management is in place, it is then possible to define the metrics around it. For more information view the follow-up blog “LEAN PRINCIPLES OF CASH FLOW EXPOSURE MANAGEMENT: DEFINING METRICS”.