As central banks battle the highest inflation rates in forty years, interest rates continue to rise rapidly, highlighting an area of finance that has been overlooked for many years. ; cash forecasting and working capital management.
But after decades of incredibly low financing costs for businesses, swings in interest rates and savings are bringing liquidity back into the spotlight.
Cash and Liquidity Management
Rising funding costs mean CFOs need to find new ways to understand and micromanage their cash and liquidity, and a sea change in mindset is needed. In my conversations with finance leaders, many say they don’t have access to the up-to-date data they need to do accurate cash forecasting or working capital planning. It is not uncommon for the available data to be several weeks old. You can’t do much with old data, especially in today’s rapidly changing environments.
For the foreseeable future, you must be prepared to manage liquidity and cash flow with great precision so that your business can understand the impact of inflation, act quickly and be ready for what comes next.
How prepared are you today?
To understand how you’re doing with managing your cash and working capital, take the following self-assessment quiz.
How confident are you in your cash and liquidity forecasts? Are you able to easily include real-time data and the impacts of changing sales and commodity prices in your forecasts?
Few CFOs and Treasurers will say yes based on my conversations with them. The reality is that most liquidity forecasting is done in spreadsheets and it takes them days or even weeks to gather the necessary data from across their entire business. So, by the time they report and forecast, the data is outdated and the analyzes are no longer accurate.
Using disparate spreadsheets not only means you’re working with old data, it also hampers your ability to see and understand the impact of external factors such as rising interest rates on your ability to take critical business decisions.
What’s needed is a way to get information about the various risks, exposures, and true values into a single financial system so you can manage working capital optimally.
For example, a unique system would allow you to prepare for rising commodity prices by predicting future cash flows. This would allow you to know your currency and interest rate exposures so that you can effectively execute hedging strategies.
An integrated financial system can also help you balance risk, inventory management, and customer service to help you manage your goals. Finally, and most importantly in these uncertain times, you can uncover savings opportunities with real-time enterprise-wide purchasing and supply chain insights.
How easily can you find and unlock cash tied up in your business and supply chain?
Without effective working capital management tools and processes in place, it is not easy to find and free up cash tied up in the business and supply chain. The ability to act quickly on pressing business events or CEO and CFO opportunities is more important than ever, yet most companies are unprepared to do so. Having visibility into your entire cash conversion cycle is a good starting point for you to make informed decisions.
How prepared are you to handle what’s next in our ever-changing and unpredictable world?
To be prepared, you need the agility to react quickly and effectively to forward-looking information and forecasts. This requires having the right strategy, the right tools (like a flexible working capital management platform that provides a centralized view of liquidity and scenario planning functionality) and the right processes to manage the impacts of proactive manner.
Is there CFO leadership to establish cross-company working capital management goals and aligned strategy?
Cash and working capital management is a cross-company effort. Think of it as a team sport that requires strong CFO sponsorship. Only the CFO can break down the layers of service denial on data sharing and work with stakeholders to determine what to prioritize and what strategy and goals to set. If you leave it all up to different departments to figure out, you’ll end up with conflicting goals and a misaligned strategy, something no business can afford anymore in times of high cost of liquidity and uncertainty.
So how did you do?
Were you able to answer all four questions? If you could, great, that means you’re in the minority today, and that’s a good place to be. If not, know that you are not alone. The good news is that solutions are available to help you take care of your cash flow and working capital. One thing is certain, liquidity will remain a priority for businesses today, especially in the context of an upcoming recession. So there has never been a better time to focus on this area.
If you want to learn more, I invite you to watch this panel discussion on Outsmarting Inflation: Best Practices in Working Capital Strategies where I discuss with other thought leaders on the subject.