Sustainable cash flow is a must for uncertain times

New forecasting tools enhance management understanding

Tools such as direct cash flow forecasting and working capital analytics are designed to enhance management teams’ understanding of sustainable cash flow by:

• Providing insights on how operational drivers influence cash flow.
• Projecting the liquidity impact of various downside and upside scenarios.
• Calibrating capital allocations to drive near-term goals without compromising long-term strategy.

Direct cash flow forecasting is no longer reserved for distressed companies, nor should it be defined as a ‘treasury exercise'. It should be embedded and integrated in the larger financial planning and analysis of the entire organization using operational stakeholder input to inform analysis. Sustainable, value-driven forecasting requires much more than a financial model. The model may be the analytical tool, but a strong governance framework activates that tool through stakeholder engagement, active dialogue, collaborative decision-making, and organizational alignment.

Defining goals empowers functional leaders

Defining a set of goals up front is not binding, but it does drive purpose and empowers functional leaders to streamline internal processes to achieve optimal liquidity.

Cadence and input: Sustainable and active liquidity management relies on a regular cadence of dialogue around a central forecasting tool. Such a cadence drives accountability but also creates a forum to understand end-to-end cash conversion issues. Accountability relies on ownership in the form of input. A primary benefit of any forecasting tool is the ability to empower functional leaders to obtain a clear understanding of how the forecasting model works, what data is being used, and what key assumptions drive cash conversion. This transparency and opportunity for input creates trust that the forecasting tool accurately reflects how each function understands the impact of their decisions on liquidity.

The importance of functional buy-in

Organizations that drive cash forecasting without obtaining functional buy-in may miss out on the true value of the exercise, which is understanding how to bridge gaps, identifying process issues negatively impacting liquidity, and implementing changes that enable better predictability.

Transparency and analysis: A central part of cash flow analysis is understanding the ‘what’ and ‘why’ behind actual and projected weekly cash flow variances. Such analysis helps organizations understand whether consistent misses are due to incorrect assumptions or underlying processes issues, and where improvements can be made.

Liquidity scenario-building can accelerate decision-making

Scenario-building around liquidity increases confidence during uncertain economic climates and accelerates decision-making.

Companies that create a strong liquidity management foundation via executive sponsorship, functional leadership/ownership, and insights derived from forecasting tools are usually better positioned to understand the impact of various scenarios on liquidity. Scenario-building can be used to understand the upside and downside liquidity impact of consumer uncertainty in the face of inflation and geopolitical unrest, or it can be used to measure the potential impact of business model changes on liquidity. For example, a scenario of falling demand may start with a change to the sales forecast, but it requires additional functional inputs to understand how and when falling demand will impact liquidity.

Drive enhanced liquidity management by investing in the foundation.

Organizations that seek leading class liquidity management through tools such as direct cash flow forecasting can start by investing in foundational governance that creates sustainable, comprehensive, and insightful use cases. Influencers of cash flow reside in functional operations. Regular dialogue among leaders from across the cash conversion spectrum can better inform how tools are built, what organizational needs those tools support, and how measurable actions will be agreed on from insights gained. Foundational governance is the backbone of effective liquidity management, and a leading practice is to design such a structure in conjunction with building a cash flow forecast.

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