If there is any certainty, it is uncertainty. And uncertainty is seemingly the theme for 2024 thus far. With the sad collapse of the Francis Scott Key Bridge in Baltimore Harbour on March 26, supply chain disruptions are once again in the news alongside continued discussion as to whether inflation is under control and if there will be interest rate cuts later this year.
To meet these challenges, the playbook for CFOs and treasurers must adapt to be more data-driven, offering more prescriptive on-demand and real-time insights.
Understand and quantify risk
The top five risks that Global 500 CFOs face in 2024 are inflation/consumer demand, increasing interest rates, currency volatility, supply chain disruption, fraud, and cybercrime. Most of these risks are macroeconomic and interlinked, simplifying the stress tests that need to be conducted to help mitigate risk.
The first step in such a strategy is to accurately capture risk exposures within the balance sheet, income statement, and cash flows. APIs can unify data to ensure tools such as the cash forecast and liquidity plans are inclusive of all enterprise data.
Quantifying risk can be as simple as answering: “What is the impact on our balance sheet, revenue, and cash flow if the euro moves 1% against the US dollar and pound sterling?”.
A more complex analysis will look at the cascading effects of an interest rate cut in one geography, but not in all regions, signifying movements in currencies and potential shifts in customer payment patterns.
Flexible forecasting and planning models are critical alongside the emerging use of AI to integrate historical data with emerging risk assessments. The result should be a more resilient forecast and liquidity plan that can be presented back to management and the board.
Take action, capture attention
If the result of quantifying risk is a more resilient cash forecast, exposure projection, and liquidity plan – then the next stage is to put these new insights into action. The key to successful actions is to inject data insights into financial process to ensure more reliable and effective liquidity decisions.
In treasury, actionability can mean implementing a cash flow strategy, an important example that continues to capture the attention of management, boards, and investors.
Looking at cash more specifically, a data-driven cash flow strategy may be structured as follows:
Measure forecast accuracy to ensure that cash forecasts are continuously improved
- This includes reconciling multiple versions of the forecast to actuals, such as data extracted from the ERP versus an AI model, to determine which is more accurate. From this constant feedback loop, we can improve the reliability of the forecast and increase our confidence in what the forecast tells us.
Refinement of cash decisions.
- This step targets idle and underutilised cash balances, where treasury has allocated more cash for working capital requirements than the forecast confirms is needed. While many global organisations will already sweep excess balances into header accounts in notional and/or physical cash pools, there are often greater investment returns available – a fact that can be confirmed in a simple cash comparison dashboard inside or outside your treasury management system.
For those businesses that have not centralised their cash pooling structures or have not formalised an IHB bank, then the opportunities to increase investing and borrowing efficiency are even greater.
Unlock new cash flow
- For many treasury teams, unlocking cash flow is limited to what is within their bank accounts. Yet as treasurers become more strategic, data silos between treasury, payables, and receivables are quickly melting away. This creates the opportunity for treasury to collaborate with their finance peers to design programmes that improve cash conversion cycles, particularly increasing DPO and reducing DSO. Treasury owns the opportunity cost of cash and is therefore in an excellent position to lead the execution of early payment and receivables finance projects that will typically free up 30-40 days of available cash.
Measure performance against objectives
Data is critical to the design, execution, and analysis of treasury performance. In the case of the cash flow strategy, treasury – with or without FP&A – can use real-time insights to predict whether cash flow targets will be met, which in turn may drive further refinement of cash flow programmes to unlock additional free cash flow for the CFO.
The key to this process is ensuring a continuous loop of data updates, from inside and outside the enterprise. Tools such as the cash forecast and liquidity plans must always be up to date to ensure that on any day, and at any time, insights are reliable. This data confidence, largely driven by APIs interconnecting treasury, ERP, and financial systems, delivers the confidence for more efficient cash decisions to be made, paving the way for liquidity improvements within treasury but also extending to FP&A and the controller.
Armed with a more data-driven decision-making framework, CFOs and treasurers can be assured of the following:
- Data enables cash and liquidity planning with greater resilience to a wide array of risk factors so that finance teams can be confident in the numbers presented to them. Uncertainty does not breed improvement.
- Empowered by data, CFOs and treasurers can confidently address what-if scenarios such as: “What if rates stay the same into 2025?” or “What if the US Fed holds steady but the ECB begins cutting rates?”
- Finance teams need more data than ever, with APIs delivering real-time data across the enterprise, paving the way for more intelligent and AI-empowered decision-making.
