Integrated Cash Flow Planning: Now is the Time
In the course of the financial crisis, liquidity and foreign exchange (FX) risk management have been identified by many corporates as weak spots that need significant improvement. Specifically, companies have realised that they do not have the right kind and quality of information at their disposal to make risks transparent in a timely fashion and manage these risks effectively. Many treasurers are therefore looking to improve their planning processes and close the gaps that have been – often painfully – exposed during the crisis. Cash flow is in the spotlight more than ever, as companies strive to avoid funding shortages, investors focus on cash flow metrics in the absence of meaningful profits, and rating agencies look for liquidity risk metrics to guide their rating actions.
Results from the recent cash management survey published by gtnews on 20 October 2009 underpin this notion. A staggering 31.3% of respondents state that cash flow forecasting is the treasury process where greatest improvement is needed. That’s no surprise, as 67% of companies say they still use spreadsheets for cash flow forecasting. Even those 20% of respondents that claim not to be managing the cash forecasting process at all will likely have been prompted to re-think their attitude during the crisis, which has shown that even financially sound companies may well encounter difficulties when trying to raise funding in turbulent markets. Interestingly, 50% of respondents say that lack of systems integration is a key stumbling block for efficient cash flow planning, 23.6% point to inefficient processes at the subsidiary level, and 35.8% identify limited availability of resources as a problem.
In our client engagements we have witnessed first hand how companies have had difficulties during the crisis to obtain the information required to manage cash flows through market turmoil. Top management put detailed questions regarding cash flows that had not been deemed relevant before, when profit was the all-important consideration, top of the agenda, and treasury needed to provide answers. Where a single cash flow figure per group company had been considered sufficient in the past, decision makers now wanted:
Obviously, such requirements cannot be met by a spreadsheet-based planning process because it has a wide array of deficiencies:
The manual planning process that we know all too well needs to be replaced. We believe that to tackle the challenges mentioned above, a system-based, integrated cash flow planning process is the way to go for treasurers. Implementing a planning process, like the one shown in the figure below, will achieve the transparency they need to thoroughly understand and actively manage cash flows and FX risks that arise from the operating, investing and financing activities of their company.
This process uses data from upstream corporate planning systems (which facilitates data generation and ensures all planners start from a common basis), allows local planners to contribute their knowledge in an efficient manner (which improves the communication between local and central entities), and provides a standardised end-to-end process and system platform for all stakeholders. By leveraging such a solution, treasury employees can focus on analysing and managing cash flows instead of aggregating Excel spreadsheets and fixing broken cell references. Through a routine feedback loop, analysis results will directly contribute to enhancing the process for the next planning cycle, resulting in continuous process improvement and, ultimately, better planning quality.
While a new automated planning process per se may not solve the problem of limited resources, it may well serve to direct available resources towards more value-adding activities. By using existing staff resources more efficiently, treasury can generate more value-add and enhance its strategic importance as an advisor to top management. The following features and benefits of integrated cash flow planning are worth highlighting in greater detail:
Some may believe that although this is all well and good, such a project will be expensive and time-consuming – do not despair. We recommend an iterative solution approach that will first realise the most essential benefits – standardisation, avoidance of errors, automated aggregation and improved reporting – through the implementation of a simple web-based data collection and reporting solution. This establishes a common cash flow information platform for all stakeholders quickly (around six months) with a manageable effort in terms of time and money.
As a web-based solution, a global roll-out will not require significant IT outlays. Rather, the focus will be on user training regarding the new business requirements for cash flow planning. Our experience shows that once the first planning rounds with the new tool have been carried out and the process has been established, there demand for increased functionalities along the lines of systems integration, planning functions for data generation, scenario analysis, enhanced reporting, and the generation of input for risk management, from FX to cash flow at risk, will quickly increase. Laying the ground with a quick-win solution, is, in our view, the ideal way to obtain management attention and buy-in, educate users on cash flow planning, and build a solid basis for a more elaborate strategic planning process on the same platform.
The past few years have shown that high-quality cash flow planning is a necessity for all companies. Not only does timely arrangement of funding and selecting the right maturity structure save interest expense and contributes to optimising investment income, it is also an essential risk management tool to steer through turbulent markets where credit is scarce and being unprepared can be costly for the company at best, lethal at worst. Increasingly, financial market participants demand cash flow data to assess a company’s viability and credit rating. Consequently, cash flow has become a key financial indicator that meets renewed interest at many companies. Treasurers need to rise to those challenges and implement an integrated cash flow planning process that allows them not only to explain existing cash flow patterns but to increase visibility by extending the planning horizon and actively manage cash flows, thereby avoiding any liquidity shortage that may arise.