In this article, we will look at why Financial Planning and Analysis (FP&A) tends not to be involved in Cash Flow and why that can be dangerous and short-sighted.

We will also look at what are some of the key elements of a good Cash Flow-focused mindset that FP&A can develop.

The Distance between FP&A and Cash Flow

If we run our private affairs in the same way as we approach cash at work, we would get in a lot of trouble with our families and friends!

A fundamental concept of organisational value is tied to present and future Cash Flows. To simplify it, the cash today (an outflow) is used to generate assets that will bring in cash in the future (inflows).

The distance between FP&A and Cash Flow is perhaps understandable. In a previous article, I wrote about how far away FP&A is from the Balance Sheet and why that is doing the function more harm than good. A Cash Flow statement from a reporting perspective is even further removed from FP&A as it is derived from the Income Statement and the movements in the Balance Sheet.

The distance of FP&A from Cash Flow has been driven by the fact that liquidity and solvency risks are managed elsewhere – normally with Treasury being in the lead. However, managing risk is not the same as managing for value.

By not focusing on Cash Flow, FP&A misses an opportunity perspective. If value is about Cash Flows, then every decision and transaction have an impact on value. But if a transaction does not lead to a Cash Flow in the end, then no value is “captured”. It may have been created, but, well, banking it is a different story….

This is why I believe it is important for FP&A practitioners to focus more on Cash Flow. Not from an operational perspective, but rather more from leveraging their standing within the business, as we shall see later in this article.

A Cash Flow Mindset in FP&A

If a transaction leads to a profit, then it must be okay, right? Not necessarily. For example, if cash is not banked from the transaction and/or it has taken a level of funding that is too high, then it is likely that we may have missed a trick.

So, from a mindset perspective, the key shift that FP&A needs to bring is a shift from a “profit” view to a “profit and cash” view.

What can this look like in practice? A few easy things to start with would be:

• Practice what you preach. Nothing builds credibility faster than if FP&A gets closer to understanding the big picture on Cash Flow and where the organisation is doing well and where not. So, demand to see the Cash Flow reporting and status.

• Bring cash to life in the operations. Any business process (the domain of FP&A / Business Finance) will lead to a transaction at some point with an external party. Help raise awareness of this within the business.

• Focus on cash conversion and deployment. These are two obvious areas in Working Capital and especially Inventory and in Capital Investments. Help analyse within the business portfolio what may be elements that are generating cash faster as opposed to trapping cash. Work with the business to address this.

• Drive learning and accountability with capital investments. Ensure post-launch evaluations are done.

• Apply Zero-based budgeting to planning, if it is appropriate within the organisation's culture. Frame as “if this were your business and you had enough financial resources, where you would want to spend it and for what return” can be very liberating and drive not a cost-conscious mindset per se but a cash and returns-focused one.

• Take a big-picture view of cash deployment when it comes to strategy. Understand the dynamics of the areas of strategic focus and the investment needs and how they are to be funded with internal or external sources of financing.

• Support the business in re-designing incentive plans to take into account cash and those elements of cash that different levels in the business can influence.

A Final Word

Helping businesses to become more cash-conscious is not for the purpose of ratcheting up pressure needlessly. The purpose is multifold:

• bring the concept of cash closer to people, especially as it is “other people’s” cash.
• force employees in the business to think about being active owners rather than just employees going from one wage check to another.
• manage cash more efficiently operationally and deploy cash more effectively strategically.

The cash mindset starts from within the finance organisation itself and, in particular, FP&A. Raising the level of financial awareness in the business has always been one of the core callings of FP&A – it is time to move this calling away from just profit to what really matters at the end of the day – cash.

The article was first published in Unit 4 Prevero Blog