The phrase “cash is king” is an unassailable corporate credo that has stood the test of time, but many companies lack the visibility, flexibility, or tools necessary to accurately forecast their planned cash balances with precision. The deployment of 13-week cash flow (13WCF) forecasts has previously been a required tool for turnaround and restructuring, but given the current market backdrop, an accurate cash forecast is imperative for CFOs to run an efficient business.
The 13WCF forecast provides pivotal visibility into liquidity, alleviating concerns around working capital challenges and less reliance on high-interest rate debt for either operations or growth. Private equity sponsors, in particular, are working with portfolio company CFOs to strategically optimize accounts receivables/payable balances and potentially deploy dry powder for growth.
Benefits of 13-Week Cash Flow Forecasts
The argument for 13WCF forecasting is pivotal to any business managing capital constraints, but here are three key advantages, no matter the situation.
1. Working Capital Has Greater Visibility and Granularity
A strong 13-week cash flow forecast build is based on accounts receivables, payables, and inventory information while using the FP&A forecast to drive other receipts or disbursements. As such, detailed analysis on an invoice and purchase order-level basis is used to determine appropriate drivers for converting revenue and expenses to cash.
In most cases, this further enhances days sales outstanding (DSO), days payable outstanding (DPO), and inventory turnover analyses to allow the company optimal usage of working capital levers.
2. Liquidity-Based Decision-Making
Improved accuracy and iterative tracking of weekly variances create visibility into the peaks and troughs of cash, resulting in efficient use of liquidity.
For some firms, this could allow M&A activity to be less reliant on debt and in other cases, reset the timing parameters for collections and disbursements while also optimizing the use of outside financial sources.
3. Book and Bank Cash Reconciliation
The 13WCF also coordinates reconciliation efforts to determine the float between book and bank cash.
Book cash flows are typically determined based on monthly financials, but a weekly forecast of bank cash creates visibility to liquidity risks related to outstanding checks. Companies can then determine the amount of bank cash required to cover float at a given time to mitigate financial commitment risks.
Challenges and CPM Solutions
When deploying a 13WCF tool to achieve these benefits, it is important to understand the three main challenges you will face and how corporate performance management (CPM) software can be invaluable in streamlining parts of the process and achieving better visibility and clarity over the treasury function.
1. Data Source Disparity
A gold standard forecast will include data from accounts receivable, payable, and inventory schedules, P&L forecasts, financial covenants, and bank account balances. Combining this data into one concise framework with specific categorizations can often be a challenge for companies with different managers for each data source — or none at all.
CPM’s core competency is its ability to ingest data from multiple data sources into a single platform. Pulling information into one place allows users to drill down into relevant details and not hunt individual data points across different software where they may or may not have appropriate security access.
2. Absence of Time and Strategy
FP&A teams are almost always overburdened and are focused on their “day jobs” of closing the books, reporting results to external and internal shareholders, and consolidating budget and forecast data. However, cash flow forecasting is an iterative process, where analysis of weekly variances requires qualitative feedback from the finance team. Carving out time for this work is critical.
A CPM tool may take an up-front allocation of resources, but the benefits will pay dividends in perpetuity given automation in time-saving areas such as updating actuals with historical bank transactions and balances, pulling current AR/AP/inventory data, triangulating assumption drivers with other metrics, etc.
3. Over-Reliance On Excel
FP&A practitioners typically rely on Excel — the “wild west” of planning. While it provides flexibility and familiarity, it may fall short in data integrity, security, reporting, and data integration. Planners are free to diverge from standard practices while calculating numbers — requiring specific manual adjustments, so version control can also be an issue.
Building parts of the 13WCF into CPM can address some of these issues, standardizing areas within the model and resulting in dependable and consistent calculation methodology, real-time web collaboration, flexible scenario modeling, and one source of truth.
Another benefit of CPM is in reporting, analysis, and detail. Performing segments of the 13WCF forecast in CPM will enable FP&A users to easily build reports and drill down into data similar to the way they are likely already doing so for their budgets and forecasts. Where the goal for budgeting and forecasting is to grow a business and its profitability, the same analytical rigor can be applied to the cash flow statement through automated/formatted reports that drill into the detail behind sources and uses of cash to fully maximize a company’s use of their liquid assets.
The bottom line is that companies, especially those in PE-backed situations, are focused on optimizing net working capital, the financing sources at their disposal, and closely managing bank cash and liquidity. Companies looking to gain better cash management visibility should not only deploy a 13WCF but should also leverage CPM to integrate multiple sources of data into a standardized projection which CFOs and sponsors can use to accurately forecast “the king” of their business.