How FP&A can address some of the key challenges in cash flow planning

Six organizational characteristics that create challenges for cash flow planning

Changes in both the external environment and internal organization make it harder for organizations 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 organizations 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 organizations, with multiple subsidiaries, where cash has never been an issue and management consequently lack a cash-conscious mindset. As long as plans are approved during the budget process, it is assumed cash will be available. This makes it difficult to get the organization to commit to playing a more constructive role in cash flow planning.
• Low or no awareness: Whilst organizations 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 organization-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, in many organizations, there is limited collaboration between the treasury function and the financial planning and analysis (FP&A) team. 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 business control domain. 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. Examples of 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 historic process. However, as complexity increases, reliance on such models comes with all the regular risks associated with spreadsheets. Treasury management systems (TMS) or even cash flow planning modules that are 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 organization, including primarily financial performance but also organizational 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 that is set as a target for incentives has to be measured and planned for. The idea is that this way, it will gain more management attention. This means that FP&A should work closely with the leadership and HR teams when incentive schemes are being designed or changed. Where possible, FP&A should introduce an appropriate cash flow element to the targets.
• Drive collaboration with other finance sub-functions: It is important to involve others when defining the appropriate model to plan for cash flow and when agreeing deliverables for the cash flow planning cycle. In particular, treasury and accounting should be involved at the design and requirements stage of any system implementation. The FP&A team needs 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 provide support by making sure important cash processes are fit for purpose. This includes those mentioned earlier, as well as other end-to-end processes such as order to cash (OTC) and purchase to pay (PTP). FP&A can also ensure that any necessary process design factors are considered upfront in the cash flow planning process. As these processes are likely to be led by the accounting and finance operations, FP&A can make sure their needs are taken into consideration 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 organization communications, management will improve the visibility of cash flow. This 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 make the 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 analyze patterns and obtain information in a timely manner.

Nevertheless, cash flow planning requires not only improved systems and processes but also a commitment from the whole organization. Everyone needs to play their part in helping the organization 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.

Want to know more?

To discover more about how Unit4 FP&A can help your organization address some of the key challenges in cash flow planning and management, check out our dedicated product pages here or click here to book a live demo