Improved Cash Management and Forecasting for Businesses

Introduction

Mondial Cash Controller, from Mondial Software is a software product that provides executive and financial managers with the information needed to make informed and appropriate decisions based on accurately forecasting the timing of payments and receipts – cash flows – within a business.

The biggest single reason for company failure is not lack of long-term profitability, but short-term liquidity problems. Often these problems are caused by poor cash management and forecasting that leads to erroneous business decisions.

This document discusses the cash management issues faced by businesses, the problems with traditional approaches, and how Mondial Cash Controller provides a solution that is easy to use, and provides a high return on the customer’s investment.

Issues Faced By Business Managers

Management Challenges

It is fair to say that every company can benefit from improved cash management. Sage, an accounting software vendor, recently noted that the biggest single reason for company failure is poor cash management and forecasting. Today most companies usually manage and forecast cash in an inefficient, ad-hoc fashion using spreadsheets or, less frequently, extensions of their accounting or budgeting systems.

Liquidity is Key to Success

It is well known that more businesses fail through lack of cash reserves than for any other reason. It is also true that this affects small- and medium-sized enterprises (SMEs) far more than larger companies. Larger companies normally have the financial leverage over customers and vendors to control cash better.

Most accountants will confirm that they face more problems related to running out of cash to meet payroll than they ever do about long-term profitability. Nevertheless, lack of available cash is a day-to-day reality for most SME's.

During cash shortfalls, banks often provide short-term funding if it can be shown that the loans can be repaid and the company is generally profitable. A company will normally only be refused further financing if it is seen to be consistently poor at generating revenue and unable to appropriately control costs. By refusing funding the bank effectively closes the company.

Good Decision Making is a Major Factor

Lack of cash is a symptom, not the underlying cause of problems faced by a business. It normally correlates more with poor business management decisions than with poor accounting. It is usually over-optimistic or poorly informed decisions that are the initial cause of cash short falls.

Many insolvency practitioners agree that most failed companies have become so through a failure of management to appreciate how their decisions will have affected liquidity rather than profitability. Implementing processes to manage and monitor cash effectively is usually the first action of an insolvency practitioner.

If this is what a company doctor will do after the fact, shouldn’t a company do it in the first place? Well, many well-run businesses do as they appreciate the benefits of good cash forecasting. It creates a virtuous circle as the risks of failure are diminished. Even if cash is going to become a problem, there will be plenty of notice, as well as good information to secure the necessary financing.

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Problems with Current Approaches

There are three methods that have evolved for forecasting and managing cash over the years. This section looks at them and highlights the limitations of each.

Spreadsheet Approach

Most accountants use spreadsheets for cash forecasting on a day-to-day basis. Their flexibility allows accountants to create forecasts from scratch and their excellent presentation facilities mean that they are the most widely accepted.

However, spreadsheets are usually linked in to neither the accounting system nor the bank. Thus all data must be re-keyed if the process is to rely on 'real' data as the basis for forecasting. In practice the accountant simply does not have time to do this and forecasting is often done using manually entered balances and estimates.

The ad-hoc nature of the spreadsheet approach, and because the preparation is a manual and time-consuming exercise, mean that in many instances cash forecasting and reporting is error prone and so undertaken less regularly than it should be.

Accounting Approach

Accounting products exist primarily for two reasons. There is the legal requirement to keep accounting records, and the need to report the company's profits and losses to management. These are both after the fact requirements and day-to-day or future performance is not the key focus.

The accounting system holds in advance many, but not all of the transactions required to record cash going in and out of the business from the cashbook perspective. Neither does it include information allowing the user to judge when transactions are going to actually clear the bank.

Nor does it allow the user to manipulate the dates on which outstanding transactions such as invoices may become cash transactions, as a means of studying and preparing for different circumstances. These two features are actually the core of what accurate cash management is all about.

The accounting systems are typically not geared up for looking at the future in a day-to-day manner, providing information from the bank perspective, or allowing the preparation of ‘what-if’ scenarios, the key factors in successful cash management.

Budgeting Approach

Budgets are usually undertaken annually, and sometimes are updated quarterly or monthly based on actual performance to date. Once the budget is completed the cash implications of meeting the budgeted targets can be extrapolated and a cash forecast produced.

The problem is that the cash forecasting is done ahead of time, is not tied in to actual, dynamic transactions and once completed is static. The second the company deviates from the budget the cash forecast is also affected. This immediately 'throws out' the ability to manage cash on a day-by-day basis as the starting point for future forecasting and management is always wrong.

The budget approach is not granular enough to take account of changing circumstances, which is exactly what is needed to manage cash effectively.

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The Mondial Software Approach to Improved Cash Management

A more thorough and complete solution to the problems of accurate cash management is required but will only be accepted by customers if it is genuinely an improvement on current processes. Mondial Cash Controller meets the criteria by including all of the features missing from the approaches explained above.

- Unlike accounting systems Mondial Cash Controller provides views from the cashbook, bank statement, and the available funds perspectives, as well as allowing forecast transaction dates to be adjusted as required. It gives the finance manager a complete day-by-day picture of corporate liquidity from historical, current and future perspectives.

- Unlike a budgeting system Mondial Cash Controller operates at the transaction level, so is extremely accurate whenever used. It is automatically up-dated as the underlying systems change so is always current.

- As Mondial Cash Controller uses the information from the existing accounting system and the bank, this reduces both the need to re-key data and the likelihood of manual errors that often occur in spreadsheet systems.

In addition to being able to streamline the business process the customer must see the improvement in the bottom line, and be able to procure a complete and not a partial solution.

A High Return on Investment

The way to quantify the benefit of any new solution is to look at the costs involved and to calculate the return on investment (ROI).

The costs of implementation are made up of three items. These are software and maintenance, training and assistance during set up, and the opportunity cost of employees' salaries during ramp up. These can be quantified and the customer has a base for ROI calculations.

The immediate ROI for customers using Mondial Cash Controller is easy to quantify. Many of the tasks associated with accurate cash forecasting today – reconciling the bank account, typing data into spreadsheets, review of credit control, performing what-if analysis, have to be undertaken manually. By automating the process and massively reducing administrative time the customer gets an immediate payback by using the system.

In the longer term the benefits of Mondial Cash Controller are even more pronounced. Deals can be structured more favorably to remove the need for financing, discounts can be obtained from suppliers and lower interest rates obtained by planning ahead, and the customer reduces the risk of the high costs that arise through the ‘emergency’ need for short-term overdrafts and borrowings.

In summary accurate, dependable forecasts allow managers to prevent cash flow problems by providing the time and notice required to put adequate financing in place. Any number of examples may be worked out according to individual customer circumstances.

A quality solution will offer information that allows decisions to be made based on the time value, as well the amount of money. These decisions can be quantified and provide the user with a ROI calculation that shows a quick payback period for the original investment.

A 'Whole Product' Customer Focus

In SME's time and resources are far more constrained than in larger organisations. It is therefore essential that products minimise installation and set up time, are easy-to-use, and maximise the value that the customer receives.

Just as important as the product are the ancillary services that ensure attention to detail when buying and setting up the product, and when requiring subsequent support services. Each of the following features and services is important

- A technical environment that users are familiar working in, including Microsoft Windows and Internet Explorer

- An installation routine that allows the user to simply put the CD in the machine and follow the simple instructions on the screen, including a set up wizard that guides the users to the position where they can start using the product straight away

- An automatic out-of-the-box link to both the existing accounting system and the company's bank that removes the need to re-key any data

- Full on-line help that allows the user to receive instructions for the specific process that they are actually using at the time

- A support program that includes free upgrades to the software, and telephone, fax, e-mail and web-based support

- Regularly scheduled training courses that are held close to the customer's location

- A thorough and well run channel program that ensures that local resellers are fully versed with all information required to provide first class assistance to customers

- Frequently asked questions system available on the website

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Overview of Mondial Cash Controller

There are two specific areas of cash management in which SME's can usually find areas for improvement. Mondial Software addresses each of these areas as follows.

Establishing the Exact Current Position

Mondial Cash History allows the user to view the exact cash and reconciled bank positions in detail at any time. Transactions are accessed from the accounting system and the bank and provide an up to date basis from which to provide forecasts.

- The cashbook view is a replication of the view of the accounting system cashbook

- The bank statement view is a replication of the current bank account position and can differ from the cashbook due to uncleared items such as unpresented cheques

- The bank cleared funds view includes only items that are cleared for use. A deposit of cheques may be on your bank statement but the bank is still waiting from clearance from the cheque payer's bank before it allows you to spend the funds

For companies with tight cash flows these bank views are as important as the cashbook view. Information can be shown in summary or detail form for any number of banks and bank accounts. Where multiple currency accounts are involved it is possible to view all the accounts in a single currency so that all accounts can be totalled and a view of the business as a whole obtained.

Accurately Forecasting Future Events

Knowing where you are today is all very well but the real trick is to accurately forecast the future so that you can account for any eventuality ahead of time.

Mondial Cash Forecast allows the accountant to predict and manage cash flows over an unlimited number of time periods, grouped by day, week or month, by automatically extrapolating the expected clearance dates for uncleared bank transactions, outstanding invoices and recurring items.

All views can be from a cashbook, bank, or cleared funds perspective, can be in summary or detail form, for periods of any length and in any currency.

Each transaction can have its expected cashbook, bank statement and cleared funds dates changed to reflect possible changed circumstances so that the forecast more accurately reflects what is likely to happen, rather than simply what is supposed to happen.

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Benefits of Improved Cash Management

In the long-term profitability is the key to the success of any business. However this long-term objective cannot be achieved without paying serious attention to liquidity in the short-term. Many tools exist for long-term planning and the recording of historical data, but short-term planning has traditionally been done using informal methods such as spreadsheets.

The main benefit is the improved ability to make informed business decisions. If a new project is to be undertaken for example, not only the accountant but the line management team can view the effect of undertaking the new project on the business, not just in terms of profitability, but also in cash flow terms.

This has a knock on effect in that, by appreciating the timing of cashflows, line managers are far more likely to understand their responsibilities in areas such as credit control, and the effect of getting customers to pay on time, rather than being ‘out of the loop’ once the customer has been billed. This is good not only for morale, but the overall efficiency of the business.

As we have seen traditional methods of forecasting are very labour intensive. The savings in time and effort can easily be quantified when it comes to a reduction in expensive temporary help, or in the additional interest that can be earned by having more funds available at the bank. Less quantifiable benefits exist too, such as the improved efficiency that goes with having better information and more time to analyse and plan ahead of time. The ROI on a good forecasting system can be impressive.

Your suppliers want your business, but they too have payroll to meet and expenses to pay and like to be paid on time. Although some companies take a hard-line approach and delay paying suppliers for as long as possible this is often a false economy. By paying suppliers on time it is easier to become a favoured customer and obtain better terms in the future that far offset the savings in interest that were generated by originally making late payments. A good forecasting system helps ensure that the funds will be available to pay suppliers on time.

Your bank manager is often your main avenue for short-term financing. If over time you are able to demonstrate consistent and accurate forecasting this can help build a strong, long-term relationship, helping you to obtain the funding you need in the future, when you need it.

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In Summary

The information that ensures short-term planning is very accurate lies in different systems such as the accounting system and the bank. The advent of sophisticated means of bringing data together from different systems allows the finance manager to access the information needed to make informed short-term decisions. Mondial Software will continue to develop software that provides the finance manager with a simple and effective system for understanding and managing the corporate cash position.

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To find out more…

You can read more about our Product Features, view a Live Demonstration, read the answers to our most Frequently Asked Questions or simply return to the Main Page.