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Total Number of Subscribers: 962 |
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Date: 11th February 2010 |
Compiled by: M Sathya Kumar <= /span> |
Integrated C=
ash Flow
Planning: Now is the Time
Integrat=
ed
cash flow planning has become increasingly important for companies becaus=
e it
addresses their increased need to save on investment expense and manage
credit risk. In the course of the financial crisis, liquid=
ity
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 fashi=
on
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 focu=
s on
cash flow metrics in the absence of meaningful profits, and rating agenci=
es
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 cris=
is,
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. Greater Transparency is
Needed
In our client engagements we have witnessed f=
irst
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: To
know exactly where in the company cash flows are generated and what busin=
ess
activity causes them. To
analyse what the drivers of those cash flows are and how those drivers ca=
n be
influenced. To
evaluate how different business scenarios play out in terms of cash flows=
. Powerful
reporting with drill-down capabilities and easy-to-use management dashboa=
rds. One
single source of cash flow information for the entire company. Obviously, such requirements cannot be met by=
a
spreadsheet-based planning process because it has a wide array of
deficiencies: It
takes too long, requires non-value add manual work, and is error-prone. In
times of increased cost pressure, it is better to use your headcount for
value-add analysis and decision making tasks than for compiling spreadshe=
ets.
Quicker turnarounds are also a key advantage. No
system support with data aggregation, plausibility and consistency checks,
scenario analysis, and reporting and analysis. Overall, this means that t=
he
process is excessively lengthy and generates results that lend themselves
badly to further analysis, which is where the real value-add occurs.
Furthermore, it is difficult to keep a consistent view of historical data
when spreadsheets are used. No
transparency as to where data comes from, what data actually represents, =
what
is in and what is not. You’re much better off establishing a common
ground for cash flow planning once and for all by providing basis data fr=
om
upstream systems, establishing standardised templates, and implementing an
intelligent process that allows planners to get rid of their complex
spreadsheet models. This will spare you endless follow-up calls with plan=
ners
to find out how they arrived at their numbers. Integrated Cash Flow
Planning
The manual planning process that we know all =
too
well needs to be replaced. We believe that to tackle the challenges menti=
oned
above, a system-based, integrated cash flow planning process is the way t=
o 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. Figure 1:
Integrated Cash Flow Planning Process This process uses data from upstream corporate
planning systems (which facilitates data generation and ensures all plann=
ers
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 proce=
ss
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 enhan=
cing
the process for the next planning cycle, resulting in continuous process
improvement and, ultimately, better planning quality. Enhanced Cash Flow Plann=
ing
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 existi=
ng
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: Rolling
planning in transaction currency for all relevant group companies gives y=
ou
cash flow visibility well beyond year-end (typically 12-24 months dependi=
ng
on business model) and allows you proactively to manage liquidity and for=
eign
currency risks that go hand in hand with cash flows. Planning
according to the direct method at a meaningful level of detail is essenti=
al
to gain insight into how cash is generated and how it is used. It enables=
you
to ask the right questions in case of follow-ups, and thus allows you to
manage cash flows better. Ultimately, your information needs determine the
data structure required, but the way the data is generated needs to be ta=
ken
into account as well. Equally essential in determining the data structure=
is
the granularity in which actuals can be provided. Upstream
systems integration establishes transparency about the drivers of cash fl=
ows
and ties back the cash flow plan to essential corporate plans, such as pr=
ofit
and loss (P&L) and sales planning. Integration into enterprise resour=
ce
planning (ERP) and treasury management systems is also advisable. You need
this information to understand how your cash flows are generated, which w=
ill
tell you which levers you need to pull in order to manage them. After all,
you can only manage what you understand. Increased
planning quality and up-to-date planning data through streamlined,
standardised process for data generation. Based on upstream system data,
planning functions will assist planners in transforming corporate planning
data (e.g. sales planning, production planning, P&L, capital expendit=
ure
planning) into cash flows. This allows you to tie back cash flows to
corporate plans in a transparent way and at the same time gather crucial
input from the field. Intelligent versioning offers insight into the data
generation process and supports analysis. This fosters a constant feedback
loop, where planning quality is tracked consistently and any issues are
followed up on in an effort of continuous process improvement. An
end-to-end process brings together all stakeholders. Local planners at the
operating level contribute their know-how and can comment on the data. Da=
ta
from corporate planning processes based on common premises is used, key
parameters allow for quick data validation. Once free cash flows for the
period are planned, treasury can use the data to plan intercompany fundin=
g,
trigger appropriate action on the capital markets and manage FX risk.
Finally, the management team is able to base its decisions on a complete =
set
of operating, investing, and financing cash flows for the planning period.
Effectively, you have created a single platform for all people concerned =
with
cash flows in your company. Actuals
serve as the ultimate benchmark for planning quality and provide insight =
into
the drivers of realised cash flows. Such information is a key prerequisite
for improving planning quality, and its information content is far superi=
or
to what plan-plan comparisons can provide. Direct method cash flow planni=
ng
therefore needs to be supplemented by a method of automatically gathering
actuals in order to bring visibility into the realised cash flow patterns=
of
the company. Some treasures will even argue that actuals need to be
understood before planning efforts should be undertaken. Significant
value-add through analysis and reporting. Flexible reporting of plan-plan=
and
plan-actuals data enables in-depth analysis and fosters understanding of =
cash
flow drivers, which can guide management decisions. It is key that
easy-to-use web reporting is available to all stakeholders at their
fingertips. As more and more companies move from rigid planning cycles to
scenario-based planning approaches, capabilities for scenario analysis
provide crucial decision-making support. Output
made available to downstream processes. Interfaces can be used to provide
cash flow data to downstream systems, such as treasury management systems=
and
risk management applications. This way, for example, cash flow planning d=
ata
can feed into cash flow at risk simulations and provide the basis for the
cash flow hedging of foreign currency risks. An Iterative Implementat=
ion
Approach
Some may believe that although this is all we=
ll
and good, such a project will be expensive and time-consuming - do not
despair. We recommend an iterative solution approach that will first real=
ise
the most essential benefits - standardisation, avoidance of errors, autom=
ated
aggregation and improved reporting - through the implementation of a simp=
le
web-based data collection and reporting solution. This establishes a comm=
on
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 wi=
ll
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 ha=
ve
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, wi=
ll
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 us=
ers
on cash flow planning, and build a solid basis for a more elaborate strat=
egic
planning process on the same platform. Conclusion
The past few years have shown that high-quali=
ty
cash flow planning is a necessity for all companies. Not only does timely
arrangement of funding and selecting the right maturity structure save in=
terest
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 be=
st,
lethal at worst. Increasingly, financial market participants demand cash =
flow
data to assess a company’s viability and credit rating. Consequentl=
y,
cash flow has become a key financial indicator that meets renewed interes=
t 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. =
Article by Christofpaul jordan |
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ewards
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