cash flow planning
ComplianceFinanceMarch 17, 2020

The importance of cash flow planning in times of uncertainty

We all wish we could predict the future, especially when money is involved. If ever there were a time to re-forecast plans, it’s now. Our current experience of an unforeseen crisis impacting business performances globally underlines the need to be ready to react and predict future changes. Cash is the most critical part of that process.

American businessman and former Congressman Chris Chocola hit the nail on the head when he said: “One of the earliest lessons I learned in business was that balance sheets and income statements are fiction, cash flow is reality.”

And this is a reality most businesses fail to deal with.

Cash Forecasting methods commonly used are usually highly generic. Broad assumptions and wide use of adjustments mean they are neither transparent nor realistic, providing little in the way of insight into organizational earnings – basically they are not very useful.

There is a missing link with business actionable drivers which can cause tunnel vision. Strategies become uninform and inflexible because the data in the statement suggests you pursue one specific plan rather than look at a range of options. These drawbacks make it all too easy to leave money on the table.

Cash Flow Planning for data citizens

Historical data is the story of a business. The best way to predict the future is to understand what has happened in the past.

Cash Flow Planning is about decision making, and the more a process can be automated, the more time you can spend on decisions as opposed to forecasts. Running simulations of business changes - think about what’s required to your business in this era of global unforeseen crisis - , through your cash flow forecast is a great way to predict their impact. If you can see any cash surpluses or shortages on the horizon, you’ll be able to make more informed business decisions when confronted by crises or by sudden market changes. This gives you a clear, compelling competitive advantage.

You can also run best and worst-case scenarios to see how your business will cope in difficult times: you will be much better equipped to find a resolution. But let’s also look on the positive side - what could you afford to do if trading proves to be better than projected?

When you can see these possibilities, you have a foundation for taking the next step forward. Businesses want to know how to succeed financially and if finance can provide an effective, actionable forecast it’s inarguably of huge value to leadership. It’s critical to make decisions and take smart risks based on a combination of great data and financial advice.

Past + present = future: welcome to “learning” cash flow planning

A one-size-fits-all model will not work for individual businesses. Not every dimension is important to every business. A business’s unique DNA is encoded in its historical data:

  • Problematic areas within the receivables ledger, such as customers who consistently don’t pay according to terms.
  • Customers and their payment behavior.
  • The most volatile components of the receivables ledger (e.g. certain business units, product lines or customers).
  • Seasonality at both a macro and micro level.
  • Experience of major disruption.

A key point is that new data is generated through day-to-day business operations. This means that the forecast model should improve over time as it continuously adapts based on new learnings to produce a rolling forecast. We know that future cash in/cash out is influenced, among other things, by expected revenues and costs and related invoicing and credit terms. In the recent past, a time-series approach has been adopted successfully to predict future sales. Similar techniques are applicable to all types of Profit & Loss accounts to create an integrated, data-driven forecasting process. This is part of a holistic view that links all the figures in your financial statements to the same drivers and makes your entire forecast process actionable for planning.

When Cash Flow Forecasting is based on a learning system, it uses incoming data to adjust the forecast it produces: its uses predicted revenues and costs as an input to infer DSO/DPO. The system runs continually and automatically, identifying and factoring in changes in the data as the business fluctuates day-to-day.

These are the reasons why we see the need for an integrated Cash Flow Forecasting methodology empowered by Machine Learning to be sufficiently accessible that anyone can be empowered to make data-driven choices about their business with confidence.

Many CCH Tagetik customers already leverage a powerful Cash Flow Planning solution to reinforce their business decisions. To learn more, contact one of our experts and find out how we are leveraging advanced technologies to provide even more guided evidence into future cash predictions for our customers!

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