Best practices : optimising cashflow in the short term, predicting it for the medium term
To protect your business, you need to know how to manage and control your cashflow. Managing it means maintaining enough liquidity to deal with payment deadlines. Controlling it means not limiting yourself to day-to-day updates on available cash levels. You also need to have access to precise information about likely cashflow developments in the weeks and months to come, thus establishing a virtuous circle of forecasts.
One commonly recurring issue that we’ve observed is that managing cashflow by focusing exclusively on a window of a few days to manage flows and balances and make decisions one account at a time can have dramatic effects when the company runs into a tight cashflow situation.
So the most important part of managing is predicting, in order to more effectively secure your company’s future. Which perspective should you choose: short term or medium term? Let’s take a look at the functions associated with each :
The short-term perspective to adapt and adjust
Short-term cashflow forecasts are often rolling forecasts that cover a period of 5 to 13 weeks. They allow the company to ensure that all of its payment deadlines will be respected in the coming month, and allow for unrushed and effective implementation of cashflow adjustment or acceleration measures such as: organising the timing of supplier payment campaigns, strengthening reminders to customers, and optimising cashflow vesting periods (for investments) and disbursement periods (for financing).
Short-term cash forecasts can also be a leading indicator of problems for the business. A tight cashflow forecast will push decision-makers to ask the right questions about managing WCR and earnings, and to trigger appropriate action plans: can the company reduce its stock levels, improve how it manages procurement or the payment conditions for its customers and suppliers, increase its margins, etc.?
These short-term forecasts are relatively simple to set up, and are based on easily-accessible data (customer receivables and supplier payables in the balance sheet, salary and tax elements, loan timetables, etc.).
The medium-term perspective to anticipate and decide
Cashflow forecasts over a longer period of 12 to 36 months are equally indispensable, and should be prepared in parallel. Updating these forecasts involves more complex factors, with larger volumes of source data and a larger number of parameters. As the timescale gets longer, the required data will be less available or reliable.
In addition, medium- to long-term cashflow forecasts are often done separately – and in parallel – by both controllers AND the cashflow team, typically using different methods, cashflow statement (CFS) formats… and management data !
CFS by the “indirect” method for financial controllers, CFS by the “direct” method for treasurers. This obviously makes it difficult to arrive at two identical cashflow forecasts! Finally, we often see a lack of coherence between short- and longer-term forecasts: they are not always based on the same logic, the same data sources, or the same assumptions, and are often not under the same people’s responsibility.
Of course, it is the CFO’s responsibility to ensure that the financial forecasts from the different services are all consistent; he or she must have a solid understanding of the underlying hypotheses to be able to explain the results and the differences.
The only way to evaluate the quality of a forecast is by comparing it to the actual results. Therefore, the CFO must focus on the importance of continuously analysing the differences between forecasts and actual results in order to adjust the parameters of the forecast model if necessary.
The CFO must be able to quickly identify the causes of those differences in order to be able to explain them and justify them with “valid reasons”: changes in business activity, changes in scheduling related to postponed payments for certain customers or suppliers, or changes in exchange rates.
Only with a cashflow forecast and recurring analysis of deviations can the CFO truly “trust the numbers” that he or she presents – or at least fully understand them.
The importance of simulations
Beyond forecasting “one-year” cashflow, it’s important to run simulations to consider different possible scenarios (best-case/worst-case) and account for potential variations in the company’s environment and business activity. The purpose of these simulations is to measure how much financial latitude the company has to:
- adjust its investments to its financial capabilities,
- make go/no-go decisions on acquisitions or internal expansion plans,
- decide on asset sales.
In Excel, these projections are extremely complex or even impossible to implement, because updates are extremely time-consuming for larger volumes of data – especially when it comes to preparing forecasts over multiple time ranges. Only a professional business tool can manage all of these parameters and allow you to confidently predict your future cash or debt situation.
The CashSolve solution lets you manage short-term and medium-term forecasts for cashflow, net debt, WCR, balance sheets, and direct and indirect CFS’s. It’s a powerful modelling, consolidation, simulation and analysis tool for both SMEs and large corporations.
Yann Fejan, Financial Controller, Groupe Phinex – Cenexi – Cash Modeling customer
“We now prepare an annual forecast and an update every month, by integrating the final balances for the month and the new customer/supplier, tax and investment timetables. So the update to the cashflow forecast is part of our monthly financial reporting process. We wanted to offer our financial partners a forecasting process based on a well-known tool that’s more professional than Excel. It helps us to make more effective forecasts.”
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