The following is a guest post from Aaron Levine, CFO at Prophix. Opinions are the author’s own.
Cash is the lifeblood of every organization, driving decisions from acquisitions to hiring. However, as we move through 2024, it’s apparent that cash isn’t as readily available as it once was.
While post-pandemic interest rate hikes have generally reduced inflation, specific goods and services remain costly. Reports from the Federal Reserve, European Central Bank and other authorities indicate a downward trend in overall inflation, but sector-specific inflation persists, making it challenging for businesses to maintain previous cash flow levels.
On top of that, rising costs are affecting wages, making it more difficult to attract and retain skilled talent. Furthermore, consumers are tightening their belts due to inflation, spending less on non-essential goods and opting for cheaper necessities.
These factors create a tough cash outlook for businesses. To thrive today, companies need predictable and manageable cash flow to ensure stability.
The solution isn’t to cling to traditional methods but to adopt new strategies that enable predictable cash flow management. Finance leaders must become cash flow catalysts, leveraging technology and innovative practices to modernize cash flow management, increasing efficiency, accuracy and strategic insight into their organization’s financial operations.
In this evolving role, technology becomes an invaluable team member, simplifying cash flow management and allowing finance teams to focus on what’s truly important — driving success in today’s fast-paced environment.
Overcoming major cash flow challenges
Managing cash flow is complex. It involves tracking and reporting incoming and outgoing cash with speed and accuracy, a task often complicated by the limitations of spreadsheets.
While spreadsheets can be useful, they come with significant drawbacks, such as data inaccuracies and manual processes. According to Gartner, 80% of finance headcount growth will be in emerging subfunctions requiring new roles and structures by 2025. With finance teams scaling rapidly, managing spreadsheets and data ownership becomes increasingly challenging.
This challenge will intensify as the workforce evolves, with a new generation of finance leaders stepping in. FEI reports that 64% of millennial finance professionals prefer specialized financial software over traditional spreadsheets for tasks like budgeting, forecasting, and analytics.
The real challenge isn’t just the limitations of spreadsheets — it’s about transforming your ability to understand and model factors affecting cash flow. By adopting new processes and technologies, finance leaders can become cash flow catalysts, driving their organizations towards efficient and effective cash flow management.
Modern cash flow management requires moving away from traditional methods in favor of processes that prioritize automation, collaboration and standardization. This approach boosts efficiency and accuracy and enables proactive financial decision-making.
Modern cash flow strategies
According to the C2FO Outlook Working Capital Survey, one in four global finance leaders across four regions say they don’t have enough cash on hand to run their business for 12 months.
Fortunately, there are simple steps you can take to modernize cash flow management and better prepare your organization for the future.
By identifying your biggest hurdles, you’re already one step closer to success. Now, prioritize proven strategies that will have the most impact, with or without technology.
Proven strategies for cash flow planning
When it comes to modern cash flow planning, reporting and analytics, are you an inhibitor or a catalyst?
- Inhibitors slow down or prevent desired outcomes, such as modern cash flow management.
- Catalysts accelerate success, transforming your approach to cash flow management.
Evaluate the following four inhibitors and catalysts to identify areas for improvement and discover how finance technology can take you further.
1. Inaccurate data → one version of the truth
- Inhibitor: Using spreadsheets to track and manage cash inflows and outflows can lead to inaccurate data during the planning process, resulting in flawed cash flow forecasts and potential strategic missteps.
- Catalyst: Implement automated calculations that feed into your cash flow budgets, such as cash from operations or investments. Once automated, focus only on cash activities that aren’t automated, like certain financing or investment activities.
2. Lack of detail → detailed cash forecasts
- Inhibitor: Cash flow forecasts involve numerous variables, including raw material prices, lead times, customer demand variability, and seasonality, which can be challenging to quantify and track accurately.
- Catalyst: Develop a detailed bottom-up cash event forecast to project cash needs accurately. Incorporate all relevant variables and seasonal fluctuations for more accurate timing and allocation of spending, enhancing strategic decision-making.
3. Difficulty adapting → new conditions to test assumptions
- Inhibitor: Inability to react to events like payment collection delays, pricing pressures from competitors, and project delays can be detrimental to cash flow management.
- Catalyst: Configure models to incorporate new data and assumptions, enabling you to assess how changes will affect cash flow. Use scenario analysis to simulate various conditions and their impacts, allowing for better risk mitigation and optimized cash reserves.
4. Currency conversion challenges → multinational financial management
- Inhibitor: Operating in multiple regions or countries complicates tax regulations and currency conversions, impacting cash flow.
- Catalyst: Apply currency conversions to data at all levels and consolidate the converted data to create comprehensive cash flow reports. This reduces errors and improves global cash reporting and tax strategies while managing exchange rate risks for accurate financial planning and analysis.
Championing modern cash flow management
With the right mindset, you can become a cash flow catalyst, advocating for a modern approach to cash flow management. In an era where cash is tight, moving beyond traditional methods and adopting strategies that prioritize automation, collaboration, and real-time insights is crucial.
Even if you can’t currently invest in new technology, there are still impactful steps you can take to modernize cash flow management. Align your people and processes, revamp your strategies and leverage your existing tools in innovative ways. By doing so, you’ll be well on your way to ensuring a stable and successful future for your organization.
