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I am deputy editor at The Banker, a Financial Times publication. I joined the magazine in August 2015 as transaction banking and technology editor, which remain the beats I cover. Previously I was features editor at Profit & Loss, an FX and derivatives publication and events company. Before that I was editorial director of Treasury Today following a period as editor of gtnews.com. I also worked on Banking Technology, Computer Weekly, and IBM Computer Today. I have a BSc from the University of Victoria, Canada.

Thursday, 29 August 2013

The secret recipe for Yum!’s treasury proficiency – part one

June 2013

At the recent EuroFinance conferences in Singapore and Miami, Katherine Wei, Director of Treasury, China, and Nishat Grover, Director of Treasury, US, both of Yum! Brands, Inc., discussed their roles in supporting the needs of a fast-growing global business through inspiring cash management strategies in the two countries. In part one of this two-part series, Grover explains how Yum! manages cash flow forecasting.

Yum! Brands, Inc. is the world’s largest restaurant company in terms of restaurants, with over 39,000 restaurants in more than 125 countries and territories. Approximately 7,700 restaurants are company owned and 31,600 are franchise, joint venture (JV) owned or licensed. The three major restaurant brands are KFC, Pizza Hut and Taco Bell.

Yum! is a US-based Fortune 250 company, with revenues of $13 billion (2012). It originated as a spin-off from PepsiCo. in 1997, so it is a relatively young company but incredibly fast-growing, led by its Chinese, Russian and Indian markets. To illustrate its evolution: in 2002 operating profit was generated mainly in the US (69%) with international operations making up less than a third (31%). In 2012, the situation was reversed with international operations generating 72% of the company’s profits.

Like many other global companies, Yum!’s cash is at held at three different levels:
  1. US and US subsidiaries.
  2. International subsidiaries and holding company.
  3. Market.
“When we first started looking at cash flow forecasting, most of Yum!’s cash was generated and held in the US. However, today more and more cash is in the field and held internationally. Therefore, we had to re-examine how we refine our forecasting processes, tweak them for each level and consolidate them into a master forecast,” says Nishat Grover, Director of Treasury, US.

“Forecasting is a bit of a science and a bit of an art. It is highly dynamic – you have to continually go back to fine-tune and refine it. You can apply historical trends and come up with a certain degree of predictability, but in other cases something can completely blindside you. Therefore, you must have the appropriate level of contingency on the upside, as well as the downside,” he advises.

The key to cash flow forecasting, according to Grover, is communication. “All of your information sources must know what is at stake and that you need the information in a timely manner with as much accuracy and consistency as possible.”

The reasons that Yum! Forecasts its cash include:
  • Liquidity management.
  • Financial control.
  • Strategic objectives.
  • Capital budgeting.
  • Cost management.
  • Currency exposure.
Yum!’s calendar is comprised of 13 four-week periods. For its short-term (under one year) forecasting, treasury uses the receipts and disbursements method, which is maintained in Excel spreadsheets but it has put in place an automated process to pull actual data by using links within the spreadsheets. “The fact is that it is a highly manual process. We have tried to automate by creating spreadsheets that are linked together and we encourage our markets to feed their forecasts directly into a specific template – but they don’t always do that unfortunately,” says Grover.

For medium- (one to three years) and long-term (up to ten years) forecasting, on the other hand, it employs the adjusted net income method. Its net cash position is determined at a central ’master’ bank account level. Grover explained that the US bank account structure was similar to other structures across the globe. “We have a master account that sits at the centre of the banking structure and cash comes into this account from all our retail outlets. Zero balancing accounts (ZBAs) are linked to master account for payments, control disbursements, one-offs, tax, etc. We set our daily net cash amount at the master account, which is held by J.P. Morgan (JPM).”

The US-based treasury performs a daily consolidated cash flow forecast for rolling 90-day period – “and we have now started extending that to six months,” explains Grover. The short-term 90-day operational forecast is aligned with the one-year forecast on a weekly basis. Then once a quarter, treasury aligns this with the three-year forecast. Every other year treasury prepares a ten-year forecast.

The technology underpinning this process is Wallstreet Treasura workstation, which acts as the central database of historical data and is used to pull actual data for forecast reconciliation purposes.

Yum! measures its forecasting success in terms of:
  • Meeting operating cash flow targets.
  • Managing discretionary spending to forecasted levels.
  • Maintaining forecasted debt levels.
  • Ensuring appropriate year-end cash levels.
  • Managing changes/sensitivities and communicating in a timely fashion.
Grover concludes that there are significant challenges to forecasting, not least is predicting specific cash flows and working capital, which is everyone’s challenge. “We tried using all the fancy models, Excel spreadsheets and software that claimed it could help forecast working capital, but there is no such thing in our experience. Therefore, we basically look at net working capital, not at the line item level.

“We have tried to do line item analysis of accounts receivable (AR)/accounts payable (AP) and inventory, etc but it just didn’t work. Instead we look at it on a net working capital basis, which gives us a fairly high degree of accuracy. There are always unknowns that we can’t predict but for the most part it works. Based on where we are today, in terms of our cash levels and access to credit, I think we have the right level of accuracy.”

 

Global multi-currency notional pooling


In order to facilitate better cash flow forecasting, a year ago Yum! embarked on a global multi-currency notational pooling project, which has “really helped us gather intelligence on what cash flows look like, how they vary and gave us some ability to forecast, at least in that middle level of cash, with a higher degree of precision than before,” says Grover. Yum! had implemented a physical pooling structure in 2008/9, which gave it visibility over just 20% of its cash in one currency.

Although it is not possible to implement notional pooling in some markets, such as China, India, Russia, South Africa, Thailand and Korea, which are key market for Yum!, according to Grover it is still useful to obtain balance information. “You may not be able to get your hands on the cash but you can check your balances, which is half the battle won,” he explains. Yum! has also benefitted from eliminating FX swaps, as well as intercompany loans to markets that need funding. “We have a better line of sight, better monitoring, better policy compliance and better risk management. We have used data from the notional pooling structure to fine-tune our forecasts.”

Despite treasury thinking that it would only take six months to set-up a global multi-currency notional pool, after one year it is about 80% of the way through. “Most of that is because of China, where each province has its own bank and they are not all linked to the master account. So first we have to get them all linked and then report out of the master account. On the cash side, however, we are almost fully implemented, with only Australia left to be brought on-board,” Grover explains.

This insight was first published on www.treasurytoday.com

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