Cash planning is not just about avoiding a liquidity crisis. Along with a better management of inventory, cash management is key to reducing working capital. As a result, being able to accurately forecast net cash flows and quickly model different scenarios, such as how fast to pursue growth initiatives without having to resort to external funding, is a top priority for CFOs. Their objective is to ensure there are sufficient funds to sustain the business, identify where lines of credit or external funding may be required to fund expansion, and identify idle cash that can be invested externally.
How often cash flow forecasts need to be run will depend on the financial security of the business. If it is struggling, it might be necessary to forecast the cash position on a daily basis to ensure there is enough cash to compensate staff and suppliers. If the business is stable, cash flow forecasting every week or month may be viewed as sufficient. However, there are considerable benefits from automating the process and running it daily. It will give earlier warning to negative variances that require attention, as well as reveal pockets of cash that can be invested overnight to earn a return for the company.
Creating accurate cash flow and balance sheet forecasts means continually updating models with data from disparate sources. This includes forecasting the company’s cash receipts and disbursements. The receipts primarily come from the accounts receivable from recent sales, but also include sales of assets, available loans, and external funding.
Disbursements include payroll, payment of accounts payable from recent purchases, tax payments due, dividends, and interest on debt. For forecasting cash flow over longer periods, less direct methods are used and typically model various assumptions about the income and expenditure line items in a forecast profit and loss account.
Having the flexibility to interchange between the two methods and different time periods is one of the most important considerations we hear from organizations that are considering a new cash planning solution. Here are four other considerations that appear at the top of their checklists:
- Variable time periods for flexible approaches Many cash planning solutions are limited to a single time dimension—either days or periods (i.e. weeks or months) and once the dimension is set up the users are stuck with it. Exactly the same issue is encountered when building cash planning on the back of an inflexible planning and budgeting solution. With the Anaplan solution, time hierarchies are very flexible and easy to manipulate so users can easily combine daily, weekly, and monthly data in their modeling. At the same time, its simplicity unifies standard short- and long-term methodologies to gain the best of both worlds.
- Real-time scenarios In an uncertain economy, the assumptions that underpin cash flow management need to be constantly updated to reflect actual trading conditions, and they should be easy to amend to produce different scenarios. That means users need to be able to change the business rules that shape the model—such as regrouping customers by different attributes and forecasting new values for key metrics for DSO and bad debt provision—all by themselves and without having to wait for results. Such scenario analysis is impractical in solutions where users need expertise in advanced scripting to make changes to business rules and where calculation is done in batch mode. By using the Anaplan platform, authorized users can quickly copy and amend existing models through the intuitive modeling interface, and can evaluate various iterations to quickly forecast scenarios.
- The drive for detail Modeling cash flows at a highly aggregated level can produce poor results that are not very useful for decision making. Working with more refined levels of groupings such as business unit, customer type, or payment method produces more predictable results and gives insights into problem areas that require remedial action. Where payments from key customers form a large proportion of the accounts receivable, they should be modeled individually and take analysis down to another level to ultimately import and analyze the entire Accounts Receivables and Accounts Payable ledgers. Building such highly granular cash planning models on legacy technology can prolong response times. Many competitor solutions are limited to working at aggregated levels using groups of customers, because once they become highly granular, response times deteriorate rapidly. Anaplan’s in-memory, HyperBlock™ technology can accommodate vast amounts of granular data and individual records from A/R and A/P ledgers can be imported, along with historical actuals and budget forecasts, and manipulated at the lowest level of detail to the give the most accurate forecasts.
- Easy yet secure Access As cash planning becomes more granular, it also becomes more useful for decision making. This means having a solution that can be accessed by a diverse group of internal and external managers that need to contribute and view data in order to support the drive to reduce working capital. Where cash planning is done on spreadsheets or using an on-premise solution proving such access is problematic. With Anaplan’s cloud-based solution, remote users such as key account managers and third parties such as distributors, can easily contribute to and receive reports by using any device with controlled and secure access to selected data.
Cash planning with the Anaplan platform could not be easier. Being a subscription-based cloud solution means you can be up and running in a matter of hours, starting with our cash planning app and then tailoring it with the dimensions, functionality, and business rules you need—all by yourself.