Cash forecasting more challenging: accurately forecasting cash to meet a firm's demands in this economic climate--while keeping both investors and analysts at bay--has become challenging for many treasurers.

• Author: Bierck, Richard
• Position: WORKING CAPITAL

Cash, as the adage goes, is king. But with liquidity constricted by the continuing financial crisis, cash has become as prized by corporate financial executives as water in a desert.

Since the crisis, treasurers can no longer pick up the phone and arrange a quick infusion of cash from commercial paper to address a shortfall in their corporate coffers. Now, treasurers must take great pains to ensure that they have enough cash on hand.

Yet, if they over-forecast their cash needs and end up with more than is optimal, they run the risk of alienating institutional shareholders. Investors may become miffed that this money hasn't been reinvested or, depending on the company's market position, hasn't been used for a share buyback that might increase its price.

These investors may also be concerned that analysts overlooking executives' best of intentions for cash on hand are downgrading stock ratings.

Though some astute investors may disagree, much of the market doesn't take this insightful view, and share price suffers as a result.

For one, Oakmark Fund Portfolio Manager Bill Nygren says he's happy to pick up stocks effectively discounted by analysts who assume companies "aren't going to do anything intelligent" with large amounts of cash.

So the liquidity crunch is putting treasury executives between a rock and a hard place regarding cash forecasting. The biggest change for corporate treasurers, says Anthony Carfang, a partner and director with treasury management consulting firm Treasury Strategies, is that: "The cost of being wrong has skyrocketed."

How can bewildered treasurers accurately forecast cash demands? What process can they use to ensure that they have enough cash tucked into short-term Treasury bills to meet different needs?

Experts advise companies confident of their ability to tap existing lines of credit to focus on cash forecasting as though the credit crunch didn't exist.

"There's no real rule of thumb on this," says James R. Simpson, founder and managing partner of Corporate Finance Solutions, a firm that helps corporations manage debt.

Simpson emphasizes that the goal is to have enough cash to cover anticipated expenses temporarily. Let's say something happened, and you temporarily didn't have access to your credit agreement. How long would it take you to fix that? Simpson says, you "need enough cash to cover expenses during the repair of that agreement."

And, he adds, "You need to fully understand your loan agreement...