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How cash flow planning can help your business grow

Sep 04, 2020

Back in March, was your business able to predict what your cash flow would look like right now in September? Do you know what your cash flow will look like in another six months?

As businesses continue to navigate cash-flow concerns, the COVID-19 pandemic has only highlighted the importance of Financial Planning and Analysis (FP&A).

What is Financial Planning and Analysis?

In simplest terms, FP&A enables you to better forecast your results and cash flow to make more strategic and growth-minded business decisions. For example, a manufacturer who wants to buy an expensive piece of equipment might hold off on doing so if their FP&A forecast predicts they might need that cash for something more critical three or six months from now.

And while no one could have predicted a worldwide pandemic, FP&A does encourage businesses to plan for multiple outcomes, including best, most-likely and worst-case scenarios — better preparing them to react to unexpected events and keep cash flowing.

When you factor growth into the equation, you can use FP&A to better understand whether your business is in a position to grow and what actions you need to take to do so. The discipline of FP&A also helps you understand what’s missing. When you put an FP&A model together and assign factor analyses (i.e., weighted averages), a few things happen. First, you realize what you need to account for that you haven’t been. Second, you realize what you’ve been accounting for incorrectly. Third, you and your stakeholders outside of finance gain more trust and confidence in the numbers supporting what you have accounted for correctly.

Additionally, with integrated planning, you’re not relying on one financial statement over another. FP&A combines your cash flow statement, budget vs. actual, profit and loss statement and balance sheet to ensure you’re taking a comprehensive look at your business and not overweighting specific numbers. FP&A is collaborative, involving contributions from across your organization, working from and producing real-time data analysis. Its charge is to work less off of historical performance and linear trends — which COVID-19 has shown to be unreliable — and more off of future-based scenario-planning.

How do you get started with FP&A?

If you’ve never performed FP&A before, it starts with identifying your desired outcomes, such as growing, reducing expenses or preserving just-in-time inventory. Your next step is to identify what you can prioritize given your operating constraints (e.g., employees, time and supplies).

With this foundation set, you can begin creating FP&A models. Models trace those activities in your operations, investing and financing. With FP&A models, especially those where you employ driver- based variables, you’ll gain further insight into how often you need to tweak these models. Organizations heavily reliant on investment arms will be tweaking their numbers more frequently as opposed to those organizations with more static investing activities.

Note that tweaking your models goes hand-in-hand with changing your business. Every change in a model should be directly related to a change in activity or action in your business. Otherwise, you’re arbitrarily adjusting your models without the ability to pinpoint exactly what you’re proving.

By modeling your business and tweaking those models as operations unfold, you can:

  • Gain greater confidence in what your business plan and cash flow statement are telling you.
  • Begin to anticipate what might impact cash flow.
  • See where your initial assumptions were wrong and how to make adjustments.

FP&A adds even more value in its ability to help you make more strategic decisions. For example, if you want to buy an expensive piece of equipment, you might think you’ll simply need to produce and sell more products to cover the cost. But then you have to factor in things like whether you have enough workers to increase production, whether they have the training they need and whether there is even market demand for more of your product. 

If you’re a private equity firm looking to add to your portfolio, FP&A helps you look past financial statements and historical performance toward the actual future for that acquisition as it becomes a staple in your overall portfolio.

How to implement FP&A

FP&A is not new, but it’s easier than ever today because of technology and automation.

Many companies have used Excel to perform FP&A, and Excel is excellent when the financials and operations of the organization are simply represented. However, when businesses become more complex — with multiple entities, lines of business, different currencies, varying charts of accounts, multiple budget contributors, etc. — Excel spreadsheets follow suit, sometimes resulting in tens of versions of planning models floating around one enterprise. To combat this, as well as many other shortcomings of Excel, we recommend using technology specifically designed for FP&A.

Are you ready to begin seeing the benefits of cash flow planning? Wipfli can help you select and implement FP&A software. As accountants and business consultants, we can help you implement strategic transformation in your business. By understanding your operations and workflows, we identify areas where you can improve efficiency and productivity. Our accountants can help you understand the impact of your financing activities. Wipfli even has an investment banking arm to assist you with M&A and investing activities.

Click here to learn more about Wipfli’s FP&A services, or continue reading on:

The true test of your FP&A capabilities

Focused forecasting with Planful, cloud-based financial planning software

Financial planning and analysis — The Magic 8 Ball® of accounting

Author(s)

Anthony Cantor
Tony Cantor, PMP
Senior Manager
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