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Guide to Confront Cash Flow Management Challenges

If you’re like most finance practitioners, you understand the critical importance of your approach to cash flow management. However, you will also have encountered (if again, you’re like most finance practitioners) some stubbornly persistent roadblocks, including, but not limited to the following:

CF Obstacle


Collection and payment profiles of the plan periods arising from planned P&L

The plan is not transactional; driver assumptions must be used to simulate payments and collections through percentage profiles or debtor/creditor days

Rentals, leases, audit fees

All such items in the P&L that may be accumulated monthly but that affect the cash quarterly, annually etc.

This is crucial for the starting point and the run-off into the plan periods. Calendar profiles need to be applied to elements that are driven more by the balance sheet

Payroll and related taxes, pension elements etc.

For obvious reasons these variables complicate the Cash Flow Management process as a whole

Value Added Tax (VAT)

VAT applicable rates vary by types of expenditure and income, on-account payments may be required

Bonus payments, capex, corporation tax, financing, dividends, etc.

Significant cash flows that require additional modelling in order to reflect the planned P&L and its supporting schedules

Sign conventions

Cash flow models need to consider the sign conventions used in the P&L and balance sheet because it will typically be part of greater business models that may be using management accounts rather than trial balance sign conventions

You also must determine whether to use all this to create a balance sheet plan and then derive an indirect cash flow statement or to model the drivers to produce a direct cash flow down to the level of the P&L

Double Entry Basis

Reliable cash flow planning must effectively be based on double-entry to ensure that the planned balance sheet does actually balance

All of this can be, and so often is, modelled in spreadsheets. But the risk of corruption and degree of complexity of the model mean that it remains the purview of a select few individuals with little participation or involvement in operational management. Managing changes to reflect new elements of a business is difficult without time-consuming maintenance, and what-if modelling can be very challenging thanks to complex and dynamic relationships across multiple models that form the core plan. A spreadsheet is not a database, it is a personal productivity tool. Data, structure and business rules are too often mixed together in a precarious position that is prone to corruption. Even the most sophisticated cash flow spreadsheet is no more than a prototype.

Strategizing Around Cash Flow Planning

It is important to first consider in cash flow planning that transactions leading to profit are not always beneficial. For instance, if cash is not banked from the transaction and / or requires an excessive amount of funding, then it is likely that the finance function had a serious blind spot in their work.

A cash flow planning mindset requires FP&A practitioners to transition from a profit-oriented perspective to a profit-and-cash-oriented perspective.

In practice, this powerful style of planning involves the following for FP&A professionals:

Course of Action

Reasoning Behind Its Benefit

Shed light on cash across 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 the awareness of this within the business.

These two obvious areas are in Working Capital and especially Inventory and in Capital Investments. Help analyze within the business portfolio what elements generate cash faster as opposed to trapping cash. You must work in tandem with the rest of the organization to address this

Walk the Walk

Credibility can only be consolidated if FP&A gravitates closer to understanding the big picture on cash flow and where the organization is succeeding and where it is not. So, demand to see the cash flow reporting and status.

See the big picture

With cash deployment you must take a broader strategic view. Understand the dynamics of the areas of strategic focus and the investments needs and how they are to be funded with internal or external sources of financing.

Capital investments will drive learning and accountability. Ensure post launch evaluations are done.

Framing your FP&A approach 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.

Embrace Re-Design Initiatives

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.

Contemporary Solutions to Cash Flow Management Challenges

Modern database platforms with their own calculation engine separates data from a structure in an integrated business model, and it models the relationships between the structures (e.g. revenue/billing affects debtors and VAT). The addition of new entities, account codes, lines of business etc. just represents adding a new structure, which could need new parameters, but the business rules are unaffected. All requirements for what-if scenarios are facilitated simply via duplicating a plan’s data set and flexing the necessary parameters to analyze the impact. Movements on the planned accounts will automatically affect the relevant balance sheet accounts, and the associated payment/collection profiles are parameter-driven to reflect the cash behaviors that decrease the balances. Overlay all the other “calendar” cash items, and you will be able to deliver a consistent, data-driven balance sheet plan that is also in sync with the P&L plan whereby the cash flow is a by-product.

Considering the driving relationships between all the planned accounts, you should keep in mind that this does not have to be limited to the level of the detail of the balance sheet. The cash drivers may be planned at the same level as the P&L, to deliver a direct cash flow output with the collection and payment profiles tuned to each operating plan. If you lack an adequate platform, this can add an enormous level of complexity and data to the planning model. Cloud platforms and database technology support scalability and accessibility for fully integrated business models in a single secure place, instead of a plethora of inconsistent duplicated business models. Like the advent of spreadsheets and personal computers in the 1980s, the creation of multiple scenarios accessible to multiple stakeholders in a collaborative, web-based environment is improving agile planning.

Technology is at, or near, the point where extension kits, rest APIs and legacy connectivity ensure that seamless integration across applications is part of typical business strategy. Business data and structures are automatically synchronized with the underlying systems to minimize maintenance and enable rapid turnaround of plans.

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