New best practices for short-term liquidity

By Marc Seewald and Milan Parikh, Oracle

Ordering more meal delivery, hanging out instead of going out, and working from home. These are some ways life changed in 2020. If you’re a finance executive at a global enterprise, another important change is that you’re having a lot more conversations about cash.

More than six months into the pandemic crisis, big companies in highly impacted industries are realizing the unprecedented cash challenges they face are part of a new normal. Cash management today requires more frequent and accurate forecasting and planning.

Highly impacted industries include retail, fast-moving consumer packaged goods, hospitality, and travel and transportation. Cash has always been king, but it’s more important than ever for these industries; the pandemic has caused several cashflow clogs and drains to happen at the same time:

• Lower sales and investment revenues
• Payment delays and unpaid invoices
• Currency devaluations
• Supply chain disruptions
• Idled assets (i.e., storefronts, hotel rooms)
• Unplanned expenses to protect employees and customers

Our clients have responded with more granular analysis, forecasting, and planning of cash inflows and outflows using Oracle Fusion Cloud ERP and EPM. More specifically, financial planning and analysis (FP&A) and treasury professionals are using these applications to collaborate closely using a single set of high-quality, integrated data.

Managing cash during rampant volatility

As we’ve talked to clients about what they are doing differently, we’ve identified an emerging best practice for short-term cash management: a 13-week rolling forecast, adjusted weekly for the cash received in the prior week. Pre-pandemic, a quarterly cash forecast was adequate, and even a few months ago, this practice didn’t appear necessary. But right now, highly impacted companies need to be much more nimble and agile. Analyzing cash flow weekly is crucial for fulfilling short-term obligations— and informing strategic decisions for planning.

Oracle Cloud ERP includes short-term cash forecasting capabilities based on accurate cash balances from transactions, such as accounts receivable (AR), accounts payable (AP), and payroll. It’s a rich set of data that’s integrated in real time, so no one has to input the data manually. This ERP forecasting module, along with the budget and planning capabilities in Oracle Cloud EPM, provide optimal data for managing cash on short-, long-, and mid-term bases.

Rich transaction and planning data are important because they give companies more confidence in projected cash balances. But the data not only has to be accurate, it must be fast-moving. ERP and EPM cloud applications help our clients to continuously—and quickly—book cash-transaction data from across their global footprints, validate it, and then make it widely available to drive insights for modeling and planning. By comparison, using spreadsheets or a cash-only forecasting application would require someone to find, input, and aggregate the data—a tedious, manual process that’s unlikely to provide timely, accurate forecasts.

With high-quality and more-frequent cash forecasting, our clients have been able to execute quick strategic pivots to improve their cash positions. For some clients, this has meant developing or emphasizing products and services with faster sales conversions, because taking in cash quickly has become a higher priority than pushing products and services that have longer sales cycles but higher profit margins. Other responses include keeping cash reserves to a minimum in countries with volatile currencies, and adjusting long-term investments for less risk and/or higher return.

De-risk long-term planning with simulations

With so many unknowns around cashflow in the short- and mid-term, it can be tough for global enterprises to make confident decisions about long-term planning, such as capital expenditures and financing. For this, our clients are relying on the strategic modeling capabilities of Oracle Cloud EPM to build and analyze different scenarios. Because of the rich data within the system, you can model using data from the entire balance sheet and not be limited to projected revenue and operating expenses. This means that when you look at different scenarios a year out, from worst case to best case, you can have greater confidence in your response plans.

An out-of-the-box capability called Monte Carlo simulation lets you stress test your plans. Solutions lacking the rich, integrated data foundation of Oracle Cloud EPM can’t deliver this type of stress testing, which is a big advantage. For example, users can put together different variables—such as gross domestic product, supply chain health, and workforce availability—and then quickly run through potential scenarios to de-risk long-range planning and come up with an optimal cash strategy for the most probable outcomes.

Charting new territory in a new world

We haven’t had a global pandemic for a century, so when you think about, our clients are charting new territory in using technology to protect their financial health. Not only is this giving them an advantage today, but they’ll be better prepared for tomorrow; even once the crisis subsides, the world won’t be the same.

We expect tighter control of cash to be a lasting outcome for many companies, because business leaders have learned the hard way how quickly cashflow is impacted by forces beyond their control.

The good news is that adopting an integrated suite of cloud financial applications can be transformative. Oracle customers are demonstrating this as they adjust for this crisis and plan for future growth.

Find out how to chart a path to growth with scenario planning and sign up for our demo series.