What is it?
Cash is king. Most businesses fail not because they don’t make a profit but because they run out of cash.
Cash is the lifeblood of any business. Cash flow modelling is the practice of planning and forecasting the sources and uses of cash. Its ultimate objective is to provide a framework that enables the most effective, efficient and economic use of available cash and the maximisation of free cash flow (the cash generated by operating cash flow less capital expenditure), which is important as it enables a business to invest in growth-generating options.
What benefits does cash flow modelling provide?
Cash flow modelling enables companies to manage solvency more proactively. It improves the sustainability of the organisation and it improves the understanding of the impact of drivers on cash flow, leading to better decisions. Modelling facilitates cash driver target setting, and it provides a basis for enhanced analysis and reporting of cash flow performance against targets as well as earlier indicators of expected future cash flows. Cash flow modelling also improves understanding of the cash impact of investment decisions, and it improves access to capital, as capital providers have more confidence.
Questions to consider when implementing cash flow modelling
Do we plan scenarios to cater for a range of risks?
Does liquidity at times constrain strategy execution?
Do we have a cash flow or liquid reserves policy?
How well does my organisation’s cash generation compare to others in the sector?
Does management have a clear understanding of the organisation’s working capital structure?
Does the quantity of data from the ERP system overwhelm our ability to structure it in a way that could support a model?
What are the key drivers of cash flow in the business; where can we source the required data to support the forecast?
Do we have the expertise and capacity to create and maintain a cash flow model?