Treasury News Network

Learn & Share the latest News & Analysis in Corporate Treasury

  1. Home
  2. Cash Flow Forecasting
  3. Releasing Trapped Cash

How mature cash flow forecasting can increase profitability by 50%

What’s the value of mature cash flow forecasting (CFF) processes?  Apart from maintaining solvency, responses to this question typically include minimizing financing and foreign currency exposure costs.  However, its value can extend well beyond these tactical sources, especially in global manufacturers (GMs).

Appreciating this value starts with an understanding of the current state of CFF in GMs.  Treasury work stations have done much to improve short term CFF processes.  However, the same is not always true of longer-term CFF. Especially in GMs having increasing numbers of products and customers that:

  • have unique price and cost structures
  • are supported by different types of services
  • share resources across multiple business units
  • have different direct and overhead cost structures
  • are subject to wider variations in demand volume and mix
  • are produced in and sold to multiple locations and countries
  • are supported by suppliers having different lead times, service and quality levels.

In GMs, these complexity-driven characteristics make CFF difficult because they blur the connection between revenues, resources, costs and cash flows.  The complication is that traditional financial [planning, budgeting and forecasting] technologies cannot cope with these complexities.  Which explains why CFF remains such a problematic process in GMs.

1 - Mature Cash Flow Forecasting

In GMs, mature CFF requires the ability to predict resource consumption, a key requirement of which is modelling the physical flow of inventory.  The same is true of other P&PM processes like rolling forecasts, scenario planning, foreign currency exposure and working capital forecasting.

What’s not always appreciated is that the models required to support such processes are the same ones needed for supply chain planning.  This means that Finance cannot establish mature CFF or financial P&PM capabilities, without sharing planning models and processes with operations.  These perspectives are outlined in more detail in two separate CTM File articles.

  • Improving CFF requires both predictive and prescriptive analytics, see
  • Why IBP isn’t improving CFF and what you can do about it, see.

The articles describe how prescriptive analytics supports mature planning models and Integrated Business Planning (IBP) processes.  Ones that resolve four complexity-driven capability gaps that undermine CFF, as well as broader P&PM processes.  The result is integrated processes where there is no difference between sales and operations planning, rolling forecasts and CFF.

2 - What’s The Value?

Such innovations eliminate the need for separate CFF, foreign currency exposure and working capital forecasting processes.  They are just one of the outputs of this integrated process.  From a tactical perspective, this creates value by reducing the cost of P&PM processes by upwards of 50%.  This is achieved by eliminating redundant and non-value added activities and technologies.

From a strategic perspective, these processes enable GMs to effectively manage complexity, the cost of which can approach 3% to 5% of sales.  Complexity-driven value erosion is experienced in different ways, as evidenced by the research study results shown below in Exhibit 1.

Exhibit 1: Complexity-Driven Value Erosion Evidenced By Research Study Results

(Link: see)

These different forms of value erosion are caused by an inability to effectively plan, manage and govern, strategic, financial and operational outcomes.  Especially in complex GMs, where these outcomes cut across multiple functions, business units and legal entities.  This happens when P&PM processes lack sufficient integration – the means by which strategies, outcomes, profits, resources and cash flows are connected.

By establishing integrated processes that can support these connections, GMs can improve CFF, while simultaneously driving strategy execution and reducing complexity costs.  Depending on the organization, these complexity costs can erode profits by upwards of 25% to 50%. Which explains the value of mature CFF and the premise of this article!

3 - Finance Transformation

Helping GMs to realize this value is central to effective Finance Transformation.  However, most programs fail to do so.  This is evidenced by research results (included in Exhibit 1) showing that only 27% of transformation efforts deliver sustainable benefits.  This happens because Finance Transformation objectives are difficult to achieve in complex organizations, as illustrated below in Exhibit 2.

Exhibit 2: Finance Transformation Objectives That Are Difficult to Achieve In Complex Organizations

(Link: see)

As GMs get larger and more complex, these objectives become highly interconnected.  They also become increasingly difficult to achieve without integration of P&PM processes.  Which is why process integration must be a central focus of effective Finance Transformation.

4 - Overcoming Obstacles

In GMs, finance transformation programs are often faced with one key obstacle.  Outdated views of IBP and broader P&PM maturity!  Traditional IBP supporters often believe that “five-step” IBP processes [and the technologies that enable them] represent leading practices.  In fact, this is not the case.  While they may:

  • Improve aspects of CFF, they don’t improve cash-based scenarios
  • Meet the objectives of operations, they don’t meet those of finance
  • Improve inventory turnover and margins, they don’t optimize profits and cash flows
  • Create tactical sources of value, they don’t improve strategy execution or resolve the value erosion shown in Exhibit 1.

Failure to recognize these outdated views can cost GMs $millions, if not $billions, in lost value.  Not to mention the often exorbitant costs of implementing outdated processes and technologies.

5 - Getting Started

Avoiding such missteps starts with modern education about IBP and P&PM integration.  This will enable executives to set the right direction, by understanding the following about mature IBP / P&PM processes:

  • What they look like
  • What they are worth
  • Incremental capabilities they provide
  • How they can be self-funded in 3 to 6 months.

GMs can experience difficulty when these direction setting steps are not completed.  Which often happens when GMs don’t look beyond “supply and demand balancing” capabilities of “five-step” processes.  The classic result being confusion about IBP objectives and ROI targets.  In addition, it’s not always clear how IBP processes will benefit Finance.  Rather than reducing workloads, the opposite can seem true.  All this can lead to funding delays, as executives are unclear about short and long term value.

Like this item? Get our Weekly Update newsletter. Subscribe today

About the author

Also see

Add a comment

New comment submissions are moderated.