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liquidityriskanalysis

Nobody likes a budget that is far off target, especially when it could result in a liquidity crisis. Luckily, most companies rarely have to experience such a stressful event. Although, in a turbulent economy where interest rates and stock indexes move up and down like yo-yos and news about corporate layoffs are part of daily news headlines, strong financial clarity does not seem like a bad idea.

So, what does a cash flow forecast mean to most people?

Here is a definition: A cash flow forecast is a plan that shows how much money a business expects to receive in, and pay out, over a given period of time. 

Based on the definition above, it seems logical that all businesses should have a cash flow forecast perfectly ingrained in their corporate processes, but is that the reality? Let’s take a closer look at this.

Are All Businesses Doing Cash Flow Forecasting?

As much as it seems to make perfect sense to have a good estimate of your future cash outflows and inflows, many companies never get around to doing it. This is especially true in small and mid-sized businesses. Some of the reasons for the lack of cash flow forecasting models are the following:

  • The finance staff don’t have time to prepare it
  • Lack of tools that automate cash flow forecasting
  • Complexity in creating a good cash flow model
  • Lack of accuracy in past models leading to reduced appetite to repeat it
  • Other business tasks or fires keep executives focused in other areas
  • The financial planning team is exhausted after then annual budget process with no time or motivation to re-forecast the budget during the year

Regardless of the reason for not doing a cash flow forecast, healthy cash flow is the lifeblood of all businesses, so there is no lack of motivation.

Let’s look at the potential benefits of accurate cash flow forecasting.

Why Do Companies Want to Project Their Future Cash Outflows and Inflows?

Most executives know they would sleep better at night if they had a mechanism that fairly accurately could tell them if the liquidity of their business is healthy or not in the months ahead.

Below is an example of a report using simple color indicators and charts to help managers analyze the company’s projected cash position based on underlying cash flow forecast.

liquidity risk analysis

There are several very logical reasons why a company can benefit from regular cash flow forecasts, including:

  1. Reduce the risk of insolvency – by having a clear idea of any upcoming liquidity issues, management can react early and avoid drama and stress
  2. Move faster on investment opportunities – if you, thanks to a cash flow forecast, early on know that the business will be flush with cash in the months ahead, you can start planning acquisitions, down payment of high interest debt, purchases of strategic capital assets, etc.
  3. Satisfy bankers to enable debt financing or other bank-backed financial transactions

In other words, solid cash flow forecasts can be of tremendous value to a management team. However, if many financial teams dread the additional work of doing planning and performing a cash flow analysis, how can companies still get it done?

How to Automate Cash Flow Forecasts?

As in many other cases, technology can help automate laborious tasks. In the case of cash flow forecasting, there is a cloud software category often referred to as Corporate Performance Management (CPM) solutions that includes vendors such as Adaptive Insights, Centage and Solver that specialize in planning, budgeting and forecasting.

Benefits of CPM tools include scenario forecasting to predict “great”, “good” and “bad” scenarios so managers can plan accordingly. In other cases, CPM solutions provide entire driver-based forecast processes. Driver-based means that the forecast includes assumptions that help automate and simplify creation of sales, payroll, expenses, balance sheet and cash flow forecasts.

Sometimes managers don’t have the time or the need for a full forecast to analyze projected liquidity, in which case they can use simulation models to quickly adjust elements of their cash outflows and inflows to see the impact on the cash position as seen in this example:

cashflowanalysis

Most executives would agree that accurate cash flow forecasts provide numerous benefits to their business. During economic turmoil cash flow forecasts can help lower the risk of running into liquidity problems and increasing the chance to be ready to jump on investment opportunities. Regardless of the motivation, there are good tools available to help automate and simplify such financial planning processes.

At Solver, we offer Corporate Performance Management Solutions that help you establish cash flow forecasts and analyses and prepare for uncertain times. Contact one of our expert team members to learn how we can help you improve your cash flow processes.

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In this article, I’ll explore what-if analytics and modeling functionality built into some of today’s budgeting software for planning that accounts for variables with Microsoft Dynamics.

Budgeting is a task that requires actual data, research, goal setting, and teamwork, and depending on your planning process, a lot can happen to change the course of your budget.  Thus, I would argue that besides historical actuals, there are enough variables in the context of financial planning for your company that makes budgeting a challenging task at times.

If you like to see some options and dynamically approach planning by being adaptable and exploratory with different outcomes, what-if analyses and modeling will allow you to do just that.  In this article, we’ll explore what-if planning and modeling functionality that comes with some modern budgeting tools for Microsoft Dynamics customers.

What is What-If Analysis? 

Basically, a what-if analysis boils down to the business end user altering the values in the cells of your budget spreadsheet to illustrate how certain changes can impact the results of your formulas.  Because a lot of companies are using Excel for budgeting, including Excel add-in planning software, we’ll talk in Excel terminology.  

For example, one term we will use is “scenario,” which is a set of values for your multiple what if analysis in excel. Users can design and save multiple sets of values on a worksheet and then substitute these scenarios into the financial plan to see the difference in outcomes. 

Another example would be if you would like to budget for your most ambitious goal setting, something in the middle, and the worst case scenario.  You can put together these three scenarios on the same spreadsheet and then, easily switch between them to see what thresholds you would need to cross to reach the results you established in your scenarios.

As we all know, budgeting is rarely a one-person responsibility, so people across the organization have to bring together actual figures and projections for the next period to set a financial plan.  If you have multiple people offering particular data in disparate spreadsheets that you’d like to utilize for scenarios, you can gather these workbooks and integrate their scenarios.  Some of the more modern solutions allow you to distribute password protected access rights, so that can smooth out collaboration and privacy concerns.  

Once you have configured and assembled all of the scenarios that you want, you can produce a summary statement that includes data from these scenarios.  This report showcases all of the scenario data in one table on a new spreadsheet.

Another Excel term that has to do with what-if analysis dashboards is a data table.  Data tables only work with one or two variables, but can include many different values for these variables. 

If you are employing a formula that has one or two variables – or even several formulas that all utilize the same variable, you can employ a data table to view all of the results in one space. 

In terms of business user friendliness, data tables are easy to understand and share because you are zooming in on only one or two variables.  While data tables are limited to just two variables, a data table can use as many different variable values as you need whereas scenarios cap out at 32 different values.  Additionally, if automated recalculation is set up for the workbook, the information in your data table recalculates automatically for fresh, real-time data.

How to Prepare for the Worst Case Scenario with What-If Analyses

What-if scenarios do have their potential drawbacks.  Because their purpose is to determine the risk and probability associated with the marketplace, evaluating past performance and projections for the future, there is a chance that the worst case scenario can happen because of the way the variables roll out in the business world.  

The worst case scenario can more or less occur even though a what-if analysis establishes that outcome as an outlier – and can you tolerate that result?  One way to be more prepared and aware of the variety of results is to do a random factor analysis, running thousands of independent trials with your software to randomly assign values to your factors. You may be wondering how to do a factor analysis in excel? The most prevalent kind of random factor analysis is called a Monte Carlo analysis, which randomly assigns factor values from a data set configured for the variable’s specific probability distribution.

Historical actuals help decision-makers understand past performance with straightforward simplicity, but revenue and expenses from last year have no influence on future performance, risk or return.  Therefore, what-if analyses can model multiple ways that your future can play out, so you can prepare to meet your own informed goals, objectives, and plans for the year.  Luckily, Microsoft Dynamics customers have a lot of options in terms of planning software.

What-if analyses and modeling are just pieces of the pie in regard to budgeting – and now couldn’t be a better time to start considering a modern, powerful budgeting tool.  While most companies are relying on homegrown processes in Excel or Microsoft’s mature budgeting offering, Forecaster, independent software vendor (ISV) products are becoming more prevalent in finance departments around the world.  Simply, this is due to the consumer-driven features and functionalities in third party offerings that provide an easy-to-use, secure, and collaborative planning for business end users.   You should consider several things, so you can pick the right solution for your planning needs.

When looking at third party software for what-if analysis dashboards, you’ll want to choose the best platform for your team. To make the best decision first evaluate the following: 

  • How secure the program is for powerful collaboration
  • Ability to fully integrate the software 
  • Comprehensive suite of BI tools
  • User friendliness of the product for your colleagues to utilize

You will also want to make sure that the tool comes with important functionality, like what-if analytics, modeling, multiple year budgets and rolling forecasts, etc.  You have a lot to consider, but budgeting as a corporate task is worth your time, money, and energy to find the premier software that can take your planning processes to the next level.  

Contact Solver for What-If Analysis Resources 

Solver offers an Excel- and Web-based budgeting module stand-alone and as part of the comprehensive suite of BI modules and would be happy to answer questions and generally review BI360’s easy-to-use Planning solution for collaborative, streamlined decision-making capabilities, like what-if analyses and modeling, with Microsoft Dynamics.