Cash Planning

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Cash planning is not just about avoiding a liquidity crisis! Along with managing inventory, better 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 ensure there are sufficient funds to sustain the business and identify where lines of credit or external funding may be required to fund expansion as well as identifying any idle cash that can be invested externally.

How often cash flow forecasts need to be run depends on the financial security of the business. If it is struggling, it might be necessary to forecast the cash position on a daily basis just to be sure there is enough to pay staff and suppliers (I’ve been there and it’s really not fun). But if the business is more stable, then cash-flow forecasting every week or month may be viewed as sufficient. However, there are considerable benefits from automating the process as much as possible and running it daily. It will give earlier warning of negative variances that require attention as well revealing pockets of cash that can be invested overnight to earn a return for the company rather than standing idle.

Creating accurate cash flow and balance sheet forecasts means continually updating models with lots of data from disparate data 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, typically modelling 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 using different time periods is one of the most important considerations we hear from organizations considering a new cash planning solution, but here is the full list of things 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. But with Anaplan, time hierarchies are very flexible and easy to manipulate so users can easily combine daily, weekly and monthly data in their modelling making it easy to model scenarios (e.g. what the end of month cash position would be if stores were open an extra day every week). At the same time, it is simplicity itself to unify the standard short and long term methodologies and get the best of both worlds.

Real-time scenarios

In an uncertain economy, the assumptions that underpin cash flow planning 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 underpin 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 get the results back without having to wait.

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. But using Anaplan, authorized users can quickly copy and amend existing models using the intuitive modelling interface and can run through various iterations very quickly to forecast scenarios (e.g. what impact opening new stores will have on free cash in the third quarter with results constantly being updated on the fly).

The Drive for Detail

Modelling cash flows at a highly aggregated level produces poor results that are not very useful for decision making. Working with finer level groupings such as business unit, customer type or payment method produces more predictable results and gives insights into problem areas requiring remedial action. Where payments from key customers form a large proportion of the accounts receivable, they should be modelled individually taking analysis down to another level with the ultimate being to import and analyse the entire Accounts Receivables and Accounts Payable ledgers.

Building such highly granular cash planning models on legacy technology prolongs 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. Whereas the Anaplan in-memory, HyperBlock™ technology can cope with vast amounts of highly granular data, all the individual records from both the 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. As Anaplan is a cloud based solution, remote users such as key account managers and third parties such as distributors can easily contribute to and receive reports using any device with controlled and secure access to selected data.

Trying cash planning with Anaplan 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, then tailoring it with whatever combination of dimensions you need and using drag and drop functionality to express the business rules – all of it by yourself.

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