Despite encouraging signs of economic recovery, liquidity remains the central issue for corporations of all sizes and hues. For larger enterprises there has been a notable shift from bank borrowings to alternative sources of finance such as equity swaps, rights issues and corporate bonds as markets have improved. In fact in the six months to July UK corporates repaid £34 billion of bank loans, a huge turnaround from the £28 billion borrowed from banks in the same period a year earlier. But this is a tale of two halves. While quoted companies can tap in to a range of sources of finance, unlisted and mid-range companies are left with no choice but to use traditional bank financing. This all means that cash flow planning remains central to business survival. So Gary Simon, FSN’s managing editor looks at what tools and techniques are available for cash flow planning and management.
When times were easier and cheap money was in plentiful supply, businesses were less concerned with cash flow planning. Buoyed by 18 years of constant GDP growth and voracious consumer demand few businesses were concerned about financing their operations. But now that the markets have turned sour attention is once again focussed on cash management and the supporting software tools.
The spreadsheet still heads the list of favoured cash flow planning and forecasting tools but it remains a mixed blessing. The flexibility of the spreadsheet is undeniable but this is also its undoing. Cash flow forecasting is an intricate process and if done properly can lead to significant spreadsheet challenges. But what is properly?
Most organisations project their cash flow on the basis of a forecast profit and loss account but rarely link the forecast to opening and closing balance sheets to prove the integrity of the forecast results. A profit and loss forecast computed in isolation is open to misstatement and error. On the other hand, generating a fully interleaved profit and loss account with opening and closing balance sheets in a spreadsheet takes users into the realms of quite complex macros. VAT or sales tax, other timing differences and complex revenue patterns can quickly create a cumbersome spreadsheet capable of being maintained only by the authors and inflexible to change. Combine this with the need to roll over results between one year and another, foreign exchange conversions and other complexities and the spreadsheet route soon becomes unworkable.
Of course the main mission is to forecast cash flow and optimise working capital in the light of different business scenarios and projects. It is these ‘what if’ scenarios that are difficult to model within the two dimensional world of the spreadsheet. Sensitivity analysis is tricky to achieve, especially when tweaking several variables simultaneously and the lack of dimensionality limits the insights that can be realistically achieved.
So what are the other options? The main choices for cash flow planning are to use an ERP system, a cheap and cheerful cash flow system or to use the specialist modelling applications that form the cornerstone of many of the major performance management systems on the market.
The ERP approach provides a helpful start but is fairly limited on its own. In an ERP system you can expect to hold a chart of accounts based budget, possibly spread over multiple dimensions such as department, project or product group, but the typical mid-market product probably limits you to less dimensions. Where the ERP system scores is in the ability to generate automatically a budget based on previous period actuals or budgets – but it’s a blunt instrument. ERP systems are geared up generally for the basics and not full scale cash flow planning. Once you have populated a ‘crude’ budget or budgets then there is an expectation that it will be exported to a spreadsheet for further manipulation and then passed back to the underlying ERP system once the budget/ forecast is complete for budget/variance reporting. Thus the ERP approach is heavily reliant on spreadsheets for the modelling component.
There are a number of cheap and cheerful products that provide a variety of pluggable spreadsheet templates which overcome the chore of building bespoke spreadsheet forecasts. For example, Exl-Plan can be used to compile 3-5 year cash flow projections by month for the first year, by quarter for the next two years and annually for the final two years. Cashflow Plan, a range of “fully-integrated” cashflow planners generates projections for 12 months ahead and incorporates a roll-forward facility to simplify updating of projections.
Sage 50 Forecasting allows forecasts to be generated directly from Sage 50 and takes advantage of Sage’s double-entry data system and pre-installed formulae to create a forecast without relying on complex and inaccurate spreadsheets. Essentially it is a specialised product that compartmentalises the required functionality allowing Sage users to forecast without re-inventing the wheel. Users can experiment with different ‘What if?’ scenarios, without affecting their base data so that they can see how things like price rises, new ventures and expansion will impact on their business.
But what solutions are there for heavy duty users that need to model their business, integrate financial and operational plans, review the impacts on individual projects, capital expenditure and resources? Or those who wish to assess the impact of long term plans on cash flow projections and funding or wish to see how a variety of financial and non-financial drivers affect outcome?
These questions take the user beyond straightforward cash flow forecasts and firmly into the realms of cash planning and management. For these needs businesses require modelling systems that allow projections to be built quickly, different scenarios to be tested and that allow projections to be compared to actual results.
It is this last point that can be most testing. Where for example is it best to carry out budget or forecast projections against actual results? The answer could be to take the projections back into an ERP system but often it is more expedient to take actual results into the business model.
The main performance management vendors such as SAP Business Objects, Oracle and IBM/Cognos are accustomed to dealing with these problems. Other vendors such as Tagetik can offer additional ‘double entry’ cash flow projections which help to ensure that fundamental concerns about the integrity of forecasts are dealt with.
With the continuing focus on liquidity for the foreseeable future it is clear that haphazard cash flow systems are an unacceptable risk. Spreadsheets quickly become unworkable and ERP systems provide only primitive support. Specialised packages offer some relief but it is the dedicated specialised products from the performance management vendors that provide ‘industrial strength’ to the serious business of cash flow planning.
