This article aims at raising awareness about strong Cash culture being paramount to taking Cash visibility to the next level. It also touches on why getting Treasury to deliver strategic value minimizes risks associated with business transformation.
by Evelyne Legaux on 15-06-2022
One thing that the pandemic crisis achieved in just a few months was to highlight the criticality of having a sustainable Working Capital management strategy in place across the Cash Conversion Cycle, to survive not only that crisis but all future ones alike.
Companies therefore had no option but to make Cash (or liquidity) a Board-level priority going forward! As a result, one particular area of focus for CFOs has since been the compelling need for a more reliable Cash Flow forecasting methodology.
So, why has Cash Flow forecasting become so important?
A simple answer is: because any changes to Working Capital represent a significant portion of the Operating Cash Flow generated or used by the running of business operations during a given period of time.
We have all heard countless times during a crisis, that Cash is King! Knowing IF you will get cash & how much of it however, is even more important!
More than ever, it is essential for any company to be able to anticipate their funding needs (or indeed estimate any surpluses) to ensure appropriate financial facilities are put in place to match same, on time & at an optimized cost.
So, what this means is the ability for any businesses to convert Operating Profit into Operating Cash Flow is essential, if they are to be resilient today!
It is therefore critical for Order to Cash (O2C) & Purchase to Pay (P2P) teams for instance to work together with Treasury to ensure that a robust Cash Flow forecasting process is in place. That is a process executed:
. at a lower level of data granularity,
. with varying time horizons,
. based on best case to worst case scenarios,
. at an increased frequency,
. and with sufficient time resources dedicated to analysing actuals vs forecast gaps.
A springboard for Instilling a strong Cash Culture…
So, to monitor their financial ability to survive, companies closely watched their Cash Flow & their ability to optimize Cash management became decisive. The crisis also prompted the need for better Cash visibility which, in turn, triggered a number of beneficial side-effects such as:
>> bringing to light the role of traditional functional silos & system limitations behind Cash Flow forecasting inaccuracy,
>> heightening people’s acceptance of change throughout the business organization,
>> helping stakeholders better understand the business & become aware of their respective day-to-day job’s impact on company’s Cash,
>> fostering cross-functional collaboration towards a common goal,
>> or creating the need for insightful real-time KPIs.
Many companies went as far as actually appointing Cash champions to give Working Capital processes the focus they deserve in a cross-functional effort. Also part of the exercise was the need to revisit governance aspects, such as redefining roles & responsibilities, evolving policies & procedures or designing meaningful performance measures.
The inherent complexity of Working Capital management led companies to develop multi-dimensional action plans that typically encompass:
. Data à access & visibility across business streams & geographies, clarity around trapped Cash & liquidity needs, accuracy & frequency of Cash Flow forecasting, ability to dynamically modify key business parameters,
. Processes à integration, simplification & standardization across geographies, automation of repetitive or rule-based tasks & approval workflows,
. People à understanding of Working Capital & the impact of each function’s operational decisions on Cash, adequate governance in place to steer Working Capital improvements,
. Resources à dedicated focus on Working Capital outside Finance, ongoing effort & performance measurement as opposed to period-end checkpoints only.
… and for Adopting new Technology!
To succeed indeed, companies here again need tools that can bind all above components together in an effective governance system that transcends functions.
And when CFOs make better use of Cash a priority going forward, not only do they need augmented reliability of Cash Flow forecasting, but they also require full visibility over short-term Cash positioning!
As a result, Treasury teams are now increasingly tasked with rationalizing, simplifying & consolidating their Cash management & forecasting processes, in much more efficient ways than ever before.
For such optimization to happen though, in a context where economic behaviours from customers or vendors have deeply changed, two aspects need to be considered:
Hence, the big push towards Treasury digital solutions that the world witnesses today for better Cash visibility, predictability & efficiency.
BUT there is more to it! Something big & exciting is happening …
Over the past couple of years, many companies have had to rapidly & deeply transform their business models to respond to the pandemic, such as moving from B2B wholesale distribution to direct-to-consumer, digitizing products for electronic consumption or else embracing e-commerce for instance.
Such business model transformation however deeply impacts the way revenue is generated & should be recognized from a finance standpoint.
As a result, more often than not, Treasury as a function has needed to be involved in business strategy discussions & has proven to be a key enabler of such transformation, by providing effective solutions & designing new processes that support it.
So, what this means is, instead of just managing the consequences of business decisions, Cash has become truly central to and Treasury has evolved to a solutions-mindset & is now getting involved at the very heart of business strategy!
Another critical shift in the world of Finance that is here to stay… and an exciting perspective ahead for all Treasury & Working Capital professionals!!
Isn’t this yet another fascinating topic? Has your Treasury team demonstrated its strategic importance to the business?
We would love to hear your Cash culture thoughts & experience on firstname.lastname@example.org or indeed through our Contact page.