Positive cash flow is the lifeblood of any organization. While I don’t think anyone questions that fact, are you really able to explain how it works in your organization? And no, I’m not talking about the cash flow statement, but rather the real business process behind the numbers. What are the drivers of cash flow? What are you actively tracking and where are the areas you’re lacking visibility?
We can certainly agree that all organizations focus on collections, which are imperative to ensuring business viability. Any issues that arise with collections are typically a symptom of something more than your customer just doesn’t have the money to pay. It may well be that the project didn’t go as planned or the goods delivered didn’t match those ordered. Whatever the case might be, this is a process that all companies focus on but truly understanding your cash outflow in detail is an entirely different ball game altogether.
Why is that? When you think about it, your cash outflow should be much easier to predict than inflows. They are totally within your control and companies typically have multiple governance mechanisms in place to regulate them. However, despite this, in my experience many companies are still lacking a fully accurate and holistic picture of their cash outflow, and forecasting accuracy ultimately suffers as a result. So, let’s focus on what we can do to control the cash outflow.
Rather than looking at your financial statement, let’s create an accurate view of the components that impact cash outflow. They can be generally summarized as follows:
- Payroll – which is simple and straightforward. It’s typically processed twice a month and your HR and payroll systems provide the accurate information needed for this. You may have some deviations, such as bonus payments, but even those are relatively easy to forecast.
- Capital expenditure – If you’re in a capital-intensive business, the process is well structured, and plans are approved as part of your budgeting or forecasting process. While the world changes around us, and so do the investment plans, either way, capital expenditure should remain easy to forecast.
- Financing – Since you have contractual obligations with your lenders, you should have full visibility into your financing costs. If the other components of your cash flow forecast are solid, coming up with your future funding requirements should be a walk in the park.
- Government fees and taxes – The government takes what it takes, and it’s predictable. You know when and how much – there’s no way around it.
- Other expenditures – This is where things get more dynamic. Compared to the other areas mentioned above, the cash flow for the remainder of spend is typically the least controlled or managed. Why is that? The simple answer is that many companies still lack the modern tools to provide visibility and control over the non-recurring, unpredictable part of their spend. The market is filled with great solutions, so if you haven’t fixed this area, there is a variety of options to choose from.
It’s the responsibility of every CFO to be able to explain the components of the company’s cash flow so that everybody in the organization can understand. You should have robust controls and forecasting mechanisms for each of these areas. If you don’t, you’re not really doing your job. Cash inflow can be unpredictable at times, but the cash outflow doesn’t have to be. Do you have the tools in place to ensure that there’s total visibility and control? If not, get the basics right and make sure that you’ve fixed the things you can fix.