Linking Forecasts to Action in e-billing
In my 25-year career in finance, I’ve found cash flow forecasting to be one of the most difficult challenges, yet one of the most critical to a company’s success. Free cash flow dictates your growth potential by determining how aggressive your corporate R&D, capital, and acquisition appetites can be. A good cash flow forecast can answer not only the “most likely state of cash?” at a future point, but the inevitable “can we do more?” that follows, such as “can we get a little more cash flow?” or “can we get a little more margin?” In answering the last two questions confidently, a good cash flow forecast helps chart the strategic potential of the company…as well as identify the future CFOs among the treasury and controller teams.
However, the reality of getting from ‘forecast’ to ‘action’ is not so easy. We are often constrained by our existing IT systems that are designed to do the forecasting piece of the equation, but leave the execution to other systems. Treasury workbenches can tell you where your cash is and help you move it, but not how and why it got there, and to what degree you could influence that behavior to ‘do more’. Their emphasis is on ‘cash’ more so than on ‘cash flow’. A forecast model in Excel may help you change assumptions in your plan, but will not be much help when it comes to executing that plan. In order to forecast, model, and execute, you need to tie your cash flow forecast model directly into transaction systems that can change the behavior of the company. How, you ask? The answer is to first understand what existing transaction systems can easily change cash flow behavior, then intelligently tie them to your forecast model.
Let me give you an example. Trade terms with customers and suppliers (such as trade discounts or interest penalties) can directly affect both cash flow and margin if used strategically. If a cash flow forecast models how a change in trade terms for invoices to customers would accelerate cash flow, you could connect that model to a billing system to quickly execute the suggested terms. Most corporations have an ebilling system of some kind that can send electronic invoices, EDI, and faxes of invoices to customers for payment. At first glance, it may look like just an “invoice archive” system. But in the context of cash flow forecasting, ebilling systems can be very powerful. Take into account the following:
Similarly, your outbound cash flow can be influenced by plugging your forecast directly into your Accounts Payable or Spend Management software. If cash is needed in the company to say, make a balloon payment, you could quickly model the cost of letting a trade discount lapse a few weeks in order to increase cash balances, then instruct the Accounts Payable system to hold up payment. If getting more margin is the goal, you could model the effects of taking advantage of more trade discounts offered by vendors (thereby lowering your cost of goods and increasing margin), and instruct the Spend Management system accordingly. In each case, forecast ties directly to action and the power of the cash flow forecast is understood.
Cash flow forecasts can also influence other systems that directly impact cash flow, such as inventory, supply chain management, and working capital systems. In a perfect world, a forecast would tie into all of the above, providing an easy method to forecast a global cash flow plan and execute the most beneficial opportunities across all systems. That would allow you to proactively manage how the company can “do more”, and get you one step closer to the corner office.