For any business to survive and grow it must have:
- A clear understanding of the market in which it operates. i.e. the factors driving the market; the competitors involved; and the returns to be made from investments.
- An effective business model that determines how value is generated for customers and the resources required to sustain it.
- Adequate funding in the form of cash both now and into the future.
Typically much of the cash required at the start will come from investors or provided as loans, but as the business grows that cash will come from existing operations. Cash is the life-blood of an organization and like any other resource needs to be carefully monitored and managed, as once spent, it can’t be re-used. As a result, the ability to accurately forecast cash and manage the way in which it is used is key for survival and growth.
The Profit & Loss with its focus on financial performance for a particular period is still the key management tool used when making decisions. But this report lacks the view on how performance generates cash, which if provided could lead to the better timing of decisions. For example, knowing when cash is available means actions could be bought forward; if it is not going to be available as planned then decisions can be delayed so that ‘unbudgeted’ finance costs are avoided.
Accurate cash forecasting is difficult to do, as it needs to take account of a number of factors that are not in the P&L. Factors such as:
- Individual customer price and payment terms
- Individual supplier price and payment terms
- Cash outflows such as loan repayments and dividends
- Unplanned finance charges due to non-budgeted cash deficits.
What organizations need is a forecast solution that can model how cash is generated and predict with accuracy future cash positions. This requires the system to hold and maniupulate a wide range of data that most OLAP based systems find hard to do, as we will see in the next article.
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