Efficient capital usage and building a cash culture to accurately forecast cash flow starts with building a model of how cash flows through your company.
With so much focus these days on transforming revenue models, finance teams also need to encourage their companies to build a model to better understand and improve visibility of how cash flows through the business—now and as it is transformed.
At a NeuGroup meeting last May, an AT member from a technology company shared her effort to model her firm’s cash flow.
Why it matters. Here are three key reasons to build a master cash-flow model:
- A company’s long-term cash-flow model forms the basis of its capital structure and supports the capital allocation and deployment planning process—i.e., efficient use of capital requires it.
- A model of firm cash flows can be a key educational tool to bolster the cash culture, shifting perspective from how earnings happen to free cash flow and how cash comes in and goes out. This perspective shift is exponentially enhanced if a firm discloses and provides guidance on cash flow to shareholders.
- A master model can streamline and standardize existing cash forecasting methodologies to improve cash forecasting.
What to ask for. When our member AT queried different departments about whether and what cash-flow models they used, she asked what each did (its objective), how they sourced data, and to whom and when their output was sent to the executive suite and board. For example:
- FP&A’s model was used to report the company’s P&L and cash position to the CFO;
- Corporate strategy employed a long-range forecast to understand the impact of M&A and other strategic moves.
A need to bring it all together. “So, the company had many forecast models, but they often disagreed with each other, frustrating management,” the AT said. “Now corporate treasury has ownership and can reconcile a lot of these models.”
What to deliver? The AT asked each of her firm’s cash-flow-model users about the level of granularity they expect from a central cash model, including the forecast’s range, whether they just need it at the parent-company level or stepping down to the regional or legal-entity level, and how often the cash-flow model should be updated.
- The result should not be a treasury model but a corporate model that can serve multiple constituencies and materially increase senior management’s confidence in its use to make important decisions.
Key Insight: There are too many pain points for treasury to establish a master cash-flow model for every part of a company on its own. Therefore, treasury, or whoever builds the master model, must share ownership of the inputs and outputs across corporate functions and levels—e.g., with FP&A—or incorporate these functions into a master cash operations function—expanding the scope of treasury in conjunction with FP&A, A/R and A/P. Shared responsibility for the model helps everyone share and learn about cash to build a cash culture.
