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Taking a Lean Approach to Cash Flow Exposure Forecasting

From the factory floor to finance: How a Lean approach can help treasury better manage currency risk.

Foreign exchange (FX) is a growing concern for more than 50 percent of companies around the globe. That’s why an increasing number of businesses are now incorporating process improvement practices—such as Lean, Six Sigma, and kaizen—into their financial risk management processes.

These methodologies, now widely used in all kinds of businesses, were originally used by manufacturers, most notably Toyota. The Toyota Production System (TPS) popularized the idea of taking a strategic approach to managing manufacturing operations with the goal of saving time and money. A flow of production based on Henry Ford’s assembly line, the TPS model helped Toyota make major strides in productivity and propelled the company into the global market. Other corporations began to follow suit and apply the principles to their own businesses. Ultimately, the TPS philosophies influenced development of the modern principles of Six Sigma and Lean production.

Companies looking to apply Lean principles to cash flow exposure forecasting need to analyze every part of the process in order to maximize the value delivered and minimize waste. They need to start by examining how they create and manage the baseline forecast, progress through understanding and trusting the exposure collection and consolidation processes, and end with production of the exposure analysis and management of the hedging strategy and decision process. Only by tackling the end-to-end workflow will an organization drive out errors and eliminate waste, minimize cycle time, and increase transparency and trust in the process and in the results.

Lean principles can clarify and streamline FX cash flow exposure forecasting by providing a framework for developing:

 

The Bottom Line

The challenge of accurately forecasting cash flow exposures is not unlike the challenges facing many manufacturers; operations groups in manufacturing and finance functions both deal with isolated and largely manual processes that rely on the ability of everyone in the supply chain to deliver the end product.

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