Having read Chris Pennington’s blog below http://bit.ly/rbkdRO, let’s go one step further!
Yes, businesses engage in treasury management. They focus, as they should, on collections, disbursements, concentration, investment and funding activities, but to my surprise I find many do not regularly forecast short to long term for these based on the rationale of business drivers and activity.
It’s like the weather. Most are happy to take a level of accuracy short term, sometimes very short term, but the weather next month and every month? Get out of here!
Most businesses have a broad range of lag indicators and run around frantically to deal with the implications of these going off in the wrong direction, i.e. my debtors days trend is rising; all sales reps hit customers hard; let’s keep back payments to non-key suppliers. Juggle juggle juggle.
And this can work! And sometimes we are helped by simplicity in our business cycle; certain regular funding, etc, lots of fixed costs, but for most life is a little more complex, a little more diverse. And this can fail! What can that look like?!
Interestingly, nearly all businesses budget for income and expenditure, some forecast frequently, a few roll their forecasts to look out at a consistent horizon, some have a stab at an integrated balance sheet and fewer still attempt a cash flow.
I am not saying balance sheets and cash flows are ignored but they are more the product of an accounting exercise done infrequently, by the few, determined through balances, some knowns established through loan schedules, etc but the majority of working capital is removed from the real rationale.
Well what would help? How about a performance management framework where budget, forecasts, both operational and financial, provide a holistic view of the business? Where business drivers lever their effects across all your key financial statements?
Imagine forecast activity driving numbers in your direct and indirect expenses, establishing debtors, your cash position, your liabilities, applying treatments such as deferred income, payment plans, prepayments, accruals, commitments.
Imagine combining your actual position rapidly, quickly allowing timing differences to be considered.
Imagine being able to quickly associate timing factors, build and apply rules, and run positions across years, to review the before and after, to compare versions, spot trends, make decisions.
Imagine being able to plan over years, to maintain rolling plans, always taking a consistent view about the time horizons that matter to you.
Imagine contributions from many participants immediately providing a consolidated view in real time, yet allowing you to deep dive into analysis at any stage.
Imagine an unlimited number of cash budget/forecast versions and with the conjunction of data wizards that make it easy to copy from one version to another and update a version with YTD actual data.
How do we realise these aspirations? We use Infor Performance Management. What’s more this solution can be extended to cover enterprise reporting, both financial and operational, capturing data from your key business systems and users to provide that holistic view of the business.
Let’s go to a case in hand. Recently we assisted a land development, master planning entity realise significant tangible wins managing projects that span 20 years or more. A key output of project budgets/forecasts is the IRR (internal rate of return). Board and treasury reports are up to 5 years and include profit and loss, balance sheet, cash flow and KPI reports. These budgets involve salaries, IT capex, asset depreciation and G&A expenses. All these outcomes are driven from budget owners making decisions about project milestones, sales margins, sales releases, etc.
You don’t need 20 year horizons to benefit from these inherent capabilities. For most a monthly position over a two year horizon provides focus, drives accountability and decisions.