Cash flow – true or assumed?

When it comes to FP&A in most businesses, the three basic statements (balance sheet, income statement and cash flow statement) are more often than not taken for granted.

They just get produced as part of the order of things.

The last year has brought the importance of cash into sharp relief for many. We’ve looked before at the importance of cash in times of volatility; the truth is that for some organisations, cash flow is what has kept the business alive in the face of the major shocks which have impacted their planning.

Having access to a cash flow projection model that is dynamic, easily updated according to changing conditions, and able to support iterative scenario analysis is no longer a luxury: it’s become a necessity.

Providing insight

Cash flow forecasting can be used to answer the following questions:

• How long can the business continue to meet existing payroll obligations?
• Has debt payment slowed down? Are there any potential problems with future customer payments?
• Can the business afford to pay its current suppliers?
• If suppliers require immediate payment during difficult economic conditions, and receipts are lagging behind revenues, can the business still afford to pay its suppliers under these conditions?
• Are there adjustments that need to be made – where could expenses be reduced?

Crisis drives a desire for greater oversight

It took the 2008 financial crisis to drive change in the regulation around liquidity reporting in banks. It is now mandatory to report ‘survival days’ – the period for which a bank can continue to operate using only currently available cash and collateral and with no access to funding markets. This regulatory requirement has made liquidity a significant factor in decision making. As a result, our banking system is safer.

Shocks and disruptions can hit cash flow hard and with no warning. Across 2020 and into this year we have seen:

• Sudden drops in customer demand
• Supplier interruptions, which lead to having to source at higher cost or being unable to service demand
• Logistics uncertainty, which can require businesses to hold more safety stock.

Dynamic planning

We’ve examined at length the importance of dynamic forecasting and scenario planning during the evolving situation of the last year. Adding the extra dimension of a ‘survival days’ model to your planning approach, requiring a dynamic picture of cash flow to hand, will further strengthen your position. It will give you access to:

• A true reflection of the likely cash position at any time
• The ability to stress test your current operating position
• Decision making based on cash reality rather than assumptions.

If your FP&A team are still creating a static, monthly cash flow statement in Excel, equip them with the tools they need to give you access to the dynamic picture that will inform your ability to make profitable decisions. With IBM’s Planning Analytics on Demand, organisations of all sizes have access to tools which will allow them to catch issues before they hit the financials. Get in touch today to discover how Planning Analytics can let you stay on top of your true cash flow position.