Working Capital Analytics: Trapped cash set free
February 3, 2020
February 3, 2020
In today’s volatile economy, companies must keep on developing new offerings, optimizing processes and investing in employees. To achieve these objectives, cash is king. Yet, proactive cash flow management can be a struggle. Could new technology help?
The challenge of effective cash flow management is faced by organizations of different maturity and in different performance contexts – both in turbulent times and in periods of financial well-being. This is driven by multiple factors, amongst which:
All of the above make it difficult enough to get a transparent picture of working capital performance and cash flow bottlenecks. The challenge is amplified by the fact that the expectations of Finance teams are constantly growing. In its role as Value Architect, Finance is now expected to not only provide full visibility on past performance, but also steer more strategic data-driven decisions about the future. It is therefore crucial that Finance can create a sufficiently accurate view on future cash flows.
In its role as Value Architect, it is crucial that Finance can create a sufficiently accurate view on future cash flows.
Let’s first take a look at different activities that lead to the creation of a cash flow forecast. They can be grouped into three blocks:
1. Gathering input data for the cash flow forecasting process
Input data are generated as part of different business processes – like open customer orders with expected delivery dates coming from Sales or expected payments to suppliers coming from Sourcing and Procurement. These data are typically reported on a periodic basis in the form of predefined Key Performance Indicators (KPIs) and used by Finance teams in the next steps. Unsurprisingly, the quality and timeliness of these data are dependent on the complexity and efficiency of the underlying business processes, the number of organizational units involved and the alignment of data definitions across them, and the maturity of information systems used for capturing and reporting on these KPIs.
2. Interpreting the inputs and preparing an integrated cash flow forecast
Aggregating and consolidating incoming data is not the most difficult task, as long as data definitions are aligned, standardized process and output templates are used, and the technology is in place to channel data towards an integrated outcome.
3. Optimizing the forecast and triggering actions to close the gaps
This is the most important step and the ultimate reason why companies strive for accurate cash flow projection: to identify in advance where possible gaps may arise and actions that will improve the outlook. Yet not every organization manages to get this right. All too often, there is not enough time left for this step because the previous two took too long. As a result, remedial actions are initiated too late to have a real impact on business performance.
Many companies face a number of common pitfalls throughout this process: disparate, non-standardized data; a lack of supporting technology resulting in time-consuming data crunching and reconciliations; no link made between financial outcomes and the operational drivers behind them, making it impossible to conclude what needs to change in order to optimize the outcomes; and finally, the absence of a cash-oriented mindset. Does this sound familiar?
Now imagine if:
Some companies are already putting these practices in place. Clearly the change will not happen overnight, and companies still need to work on all aspects of the process to ensure it yields tangible improvements. It starts with establishing the necessary fundamentals:
Leveraging advanced analytics techniques, companies can go much further and unlock powerful levers to optimize cash performance. Examples of working capital optimization enabled by analytics include:
Discover how a leading pediatric hospital improved its accounts receivable and cash management processes, and read more about how the latest technologies are helping to drive cash flow impact.
Besides optimizing free cash flow and freeing up low-cost cash for future investment opportunities, companies investing in their working capital management process typically benefit from additional outcomes:
What can your organization already do to start moving towards better working capital management?
Feel free to get in touch to discuss.