Cash flow planning can look deceptively simple. In this blog, we look at what makes cash flow plans a challenge and the role that FP&A can play in strengthening cash flow planning.

Six Organisational Characteristics that Create Challenges for Cash Flow Planning

Changes in external and internal environments make it harder for organisations to plan their cash flows.

• Increase in business complexity

The changing nature of competition and the rapid pace of technological advances have caused an increase in the number of different business models, go-to-market channels and product and service portfolios. This has forced organisations to embark on a transformational journey while also making it challenging to adjust cash flow planning to be more flexible and agile.

• Internal complacency

This trait can be especially evident in large organisations with multiple subsidiaries, where cash has never been an issue and management consequently lacks a cash-conscious mindset. As long as plans are approved during the budget process, it is assumed that cash will be available. It makes it difficult for the organisation to commit to playing a more constructive role in cash flow planning. 

• Low or no awareness

Whilst organisations have become more transparent in their communication of profit performance against plan, this is not the case for cash flow. This lack of visibility, combined with organisation-wide targets that are not cash-focused, leads to a relative disinterest in cash flow. It can be summed up as “out of sight, out of mind”.

• Lack of coordination within finance

Although finance is responsible for reporting and planning accurate cash flows, there is limited collaboration between the treasury function and the Financial Planning and Analysis (FP&A) team in many organisations. In fact, responsibilities are often divided across finance sub-functions. For example, accounting tends to be in charge of credit collections and inventory, while capital expenditure sits within the domain of business control. Any lack of coordination between all these sub-functions of finance will make planning inefficient and difficult.

• Poor or rigid processes

If there are no clear standards and procedures in place for cash flow processes, then it will be a challenge to collect the relevant information required for insightful planning. Such processes include credit collection, supplier payments, bank reconciliations, capex approvals and asset disposals.

• Inadequate systems

Most cash flow planning is performed on spreadsheets within old models that are updated through a repetitive historical process. However, as complexity increases, reliance on such models comes with all the regular risks associated with spreadsheets. Treasury management systems (TMS) or cash flow planning modules integrated into financial planning software can alleviate many of these risks. They may also offer better flexibility and increased visibility. Yet, there is an associated cost due to the required implementation and maintenance of such a complex system.

How Can FP&A Play a Stronger Role in Addressing These Challenges?

FP&A is responsible for the overall planning cycle of the organisation, including not only financial but also organisational performance. The main focus is on the profit and loss account. However, FP&A can take the following steps to raise the priority level of cash flow and help address some of the challenges mentioned above.

• Drive changes in incentives

Any metric set as a target for incentives has to be measured and planned for. The idea is that this will gain more management attention. It means that FP&A should work closely with the leadership and HR teams when incentive schemes are being designed or changed. FP&A should introduce an appropriate cash flow element to the targets where possible.

• Drive collaboration with other finance sub-functions

Involving others when defining the appropriate model to plan for cash flow and when agreeing on deliverables for the cash flow planning cycle is important. In particular, treasury and accounting should be involved in the design and requirements stage of any system implementation. The FP&A team need to make sure that they are invited to any cash flow-related meetings run by other sub-functions since engagement is much easier to generate when it is part of a regular cadence and cycle. On top of this, being invited to other meetings allows FP&A to proactively invite others into their own planning meetings.

• Take ownership of process improvement

FP&A can support by ensuring important cash processes are fit for purpose. It includes those mentioned earlier and other end-to-end processes such as order to cash (OTC) and purchase to pay (PTP). FP&A can also ensure that necessary process design factors are considered upfront in the cash flow planning process. As these processes will likely be led by the accounting and finance operations, FP&A can ensure their needs are considered during the design phase.

• Improve visibility and transparency of cash flow outcomes

By giving attention to cash flow development during all performance management discussions and other organisation communications, management will improve cash flow visibility. It will help bring focus, especially within the finance community, to shortcomings in the existing processes or systems that need to be fixed.

By ensuring that cash flow planning is efficient and effective, FP&A will be able to move from being gatekeepers to trusted business advisors.

Summary: Cash Flow Planning Is More Than It Appears

Cash flow planning appears deceptively simple. However, there are even more items that drive cash flow than profit. FP&A professionals should use modern technology to identify these drivers and provide sufficient support to the decision-making process. In the rapidly changing business environment, the right tools can help FP&A professionals analyse patterns and obtain information promptly. 

Nevertheless, cash flow planning requires not only improved systems and processes but also a commitment from the whole organisation. Everyone needs to play their part in helping the organisation achieve its optimal cash reserve level. Raising everyone’s awareness and gaining commitment is an important step forward that should be accompanied by the use of the right technologies.

This article was first published on the Unit4/Prevero blog.