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Managing cash flow and plan alignment with Integrated Business Planning
15 May 2020
By Oliver Wight Partner, Mike Snape
As organisations across the globe focus their efforts on understanding and combating the pressures and risks presented by the coronavirus pandemic, many businesses are relying on their Integrated Business Planning process to understand the ‘new normal’ and remain agile and responsive throughout these uncertain conditions. One of the underlying fundamentals of a successful and sustainable Integrated Business Planning process is the core principle that the entire business must work from one set of numbers, thereby creating a collaborative structure, decreasing silo working and bias, and establishing ‘the truth as we know it’ to determine the next course of action.
Businesses that have fully embraced IBP will not only be looking at resources in terms of equipment, people, storage and capability but will, of course, be considering cash. In order to build a cash flow projection, the three review steps (product, demand, and supply) must incorporate a financial view. Ensuring full financial integration through the IBP process significantly increases clarity across all functions so that key decisions can be made and deployed effectively. The mid-term plans developed for the product, demand, and supply steps (including a financial view) can be developed further through the integrated reconciliation step of an Integrated Business Planning process to give a forward view of not just revenue, costs, and margins but also of cash flow. Having a cash flow plan running through your IBP process will not only ensure that wider teams understand the strategic approach with regard to cash but will also further engage these teams in contributing to your organisation’s overall targets.
Having spent more than 20 years working in the manufacturing industry and four years as an Oliver Wight Partner with a diverse range of clients, I have summarised my top five reasons for managing cash flow with an Integrated Business Planning process:
This first reason is straightforward; realising that IBP is the most effective way to run their business, organisations include cash flow plans as an output from the reconciliation step to better understand the impact of changes which are then reported at the business review step of the process.
Building further on the above point, having clarity on your cash position through the integrated process aligns decisions and their impact on working capital and working capital targets. These decisions which can impact your cash position can be related to inventory builds (especially in a seasonal business), raw material hedging, and WIP levels. Linking the impact of these supply aspects to cash flow can allow further integration with your debtor and creditor days to fully understand your position and drive targets.
Having a longer-term view of your cash position through the monthly rigour of a good IBP process can be useful if you are planning any capital expenditure or acquisitions. Cash flow targets can be managed through the process to align plans to generate positive cash flows in order to realise these investments.
IBP enables the cost of finance to be tracked, meaning relationships between this and holding inventory, for instance, can be monitored to ensure businesses are more dynamic and responsive.
If you are a business that runs on debt or with limited cash, IBP can help you build clarity on your financial position, build assumptions on the lending markets and plan ahead in terms of your strategic approach. Banks like to lend (after all this is how they make their money) and sometimes taking advantage of competitive rates to leverage investments can be a good approach for accelerated growth, especially with low interest rates, as opposed to having cash sat idle in the coffers.
If you have taken the time and invested in the deployment of Integrated Business Planning, make sure you extract full value from it by ensuring good financial plans are integrated, including cash flow. Should you not already have an IBP process in place then it is worth noting that IBP is not another acronym for S&OP and is not a supply-led process for managing supply and demand balances. Instead, it is an advanced process led by your most senior management which aligns and deploys your business strategy, allowing you to understand how you will use cash flow to drive and influence decisions.