Episode 35: Cash Flow Management for CFO Office Success

Madhurima Gupta (00:00):
Hi, welcome to the CFO Circle podcast. I’m Madhurima Gupta, your host, and today I have with me Paul DeCrane. Now, before we go ahead and introduce you, our amazing speaker, I wanna talk about the topic that we are gonna discuss today, and that’s cash flow management for CFO’s office success. Um, and this particular topic today is extremely essential to what we talked about given the state of economic volatility that we are going through. And liquidity is definitely one of the top concerns for the CFO’s office today. And business leaders cannot really use a crystal ball to predict, uh, prob economic collapse. However, due to market turbulence and the potential of financial instability, it is advised that the key to minimizing threats in a recession prone and, you know, in some way say that recession is already here, is to be proactive rather than reactive during the current economic situations. So we are gonna discuss more about this with Paul. Hey Paul, welcome to the show.

Paul DeCrane (00:58):
Yeah, thank you for having me today.

Madhurima Gupta (01:00):
I am so ecstatic to have this discussion with you, but before we dive right into the topic, I wanted to introduce our listeners to you. So Paul is a senior business leader and trusted advisor. He’s the North American practice leader at Xanders. He leads a team of more than 250 consultants across body countries, and his experience includes helping businesses align performance with the expectation of shareholders-wide, enterprise-wide financial transformation projects. He was previously the global treasury and commodity service practice leader at EY. So, um, I don’t think there’ll be any person better than talking about the topic that we have on the cards today. On that note, uh, Paul, uh, would you like to explain your journey to our listeners in your own words?

Paul DeCrane (01:46):
Yes, uh, thank you very much. Yeah. So, uh, out of my 25 years plus experience, uh, started off at, you know, my, my experience began in banking. So I really have an eye for what the needs are from a banking perspective, rating agency perspective, uh, for what everyone’s looking for, especially through times of volatility and through times where resilience is really important in order to make sure that you have your balance sheet in a position where you’re able to respond to economic issues that develop, uh, ahead of time. So, uh, going back to the earlier, uh, concerns that we just mentioned about liquidity, I think as we look at the market today, as we look at a heavy global inflation environment, really making sure that, uh, making sure that your cash position as well as liquidity, supporting it is in a good, is in a good situation so that you can respond to market and economic issues as they, uh, as they start to develop is really important.

Madhurima Gupta (02:49):
And, um, you know, given your experience, um, I wanted to understand from you, and it’s a very basic question, so it’s always good to get started with basics. How can a fragmented cash flow management system impact your order to cash cycle? And, um, with recession upon us, how does that complicate things even more?

Paul DeCrane (03:11):
It’s a very good question from a simple viewpoint. Uh, the first challenge with the number of companies, especially as we’re coming out of a cycle of heavy growth acquisition and in many cases a lack of integration spend, especially going through a pandemic, uh, the biggest concern is visibility, uh, to where the cash is and the timing for when it’s available. And I think that second part is what, when you think of finance, uh, really becomes the variable that is most challenging. The timing of when cash is gonna be where, uh, if you look at book cash, that’s generally the understanding that’s based on a number of accounting assumptions on where that cash should be, and categorically whether or not it theoretically should be available or not. But when you look at the bank accounts, the timing of the money being, um, positioned, transacted, settled and confirmed is, um, can create timing issues as far as your access to the funding and the mobility and fungibility of that funding to be able to use for all the purposes. So I think visibility and understanding the timing of availability is critical, especially as we enter what could be a more difficult, uh, uh, macroeconomic, um, environment where cash may become a little bit more of a high priced and less available resource.

Madhurima Gupta (04:40):
Great. And what are the drawbacks of managing cash using traditional methods like spreadsheets? Uh, specifically in, in times today of economic uncertainty

Paul DeCrane (04:50):
The problem with spreadsheets is it requires an aggregation. So if you think of when you put your cash position together, the more it’s automated, the better visibility you have and the timing, this goes back to the timing element. So timing really to have the best view are ultimately everybody would like to have a real time view to cash, but to have a real time view to cash requires a heavy level of automation. And that autonomous finance really kind of takes on a new life as far as you really need to have continuous communication on what information is where. And that is nearly impossible to handle within the, uh, construct of a spreadsheet because of the data input and the bilateral flow back and forth that, uh, is required between all your, your various banks, between your various, um, uh, people that you’re transacting with or companies that you’re transacting with. So having a system and a process, and I, I, and I really would like to emphasize system and process that will help drive that automation and drive that visibility on the timing of where funding’s gonna be at what point in time is really important.

Madhurima Gupta (06:05):
And, uh, how about accuracy? Right? So, uh, definitely if you’re running through, uh, spreadsheets, there’s low visibility, but even accuracy is really low for whatever information you have accessible. Now, how does, um, you know, inaccurate data, um, you know, impact liquidity planning,

Paul DeCrane (06:24):
Inaccurate data, uh, the way it impacts liquidity planning, and, and let’s be, let’s be frank, that a lot of people know what they’re, when they’re thinking of forecasting. So then introduce idea forecasting. So understanding what you have today and where it’ll be tomorrow is, is really important. So a forecast starts with what you can see today. So what’s your current position and where does it sit? And then it evolves over time. If you have the wrong view today, you’re not gonna have the right view for tomorrow. So that makes it, that’s, that’s one, one issue that needs to be overcome. Uh, if you have an understanding of what your shortcomings are and what you can see today and your information on where everything is today, that makes it more difficult to predict tomorrow. Cuz you really don’t know where today is based upon those issues. So what you try to do is you end up compensating for what those issues are and you end up by not having the automation in place to get you to where you are today, you end up inhibiting the automation on how you can respond to different market changes tomorrow or whether it’s within the business or external to your business. So really there’s this dependency from start to finish to be able to be as automated as possible to be able to have, uh, a, a good view today so you can make the best decisions you can for your organization today. And that enables you to also have, uh, more of an outward looking view on how you can handle, uh, issues in the future.

Madhurima Gupta (07:58):
Absolutely. And I think we should not even restrict ourselves to just automation because a lot of people, you know, may restrict themselves to just, um, using RPA bots to automate certain processes. Uh, it is also important to use all the data that you have for intelligently making decisions that can help in forecasting and optimizing cash flow. Um, is that something that you’ll agree With?

Paul DeCrane (08:23):
Yes. So automation, I, I think there’s two things that people tend to think of when they think of system support or systems enablement. One is automation, but the other is more important and it’s functionality. So, and I’m glad you brought up the whole idea of, uh, robotics and how it supports a process. Cause when you look at the half of the equation, it’s automation robotics can help, um, routinize, uh, from a machine perspective, repeatable activities. Uh, when you, you talk about functionality, there are systems that are built to handle activities and tasks, um, whether it’s, whether it’s uh, systems processing, whether it’s data aggregation, and a lot of those activities are, there’s applications out there that can handle those activities that are designed to handle those activities most effectively. So you wanna use the right technology, whether it’s a functional application or an automation application. The automation applications don’t generally provide the functional capabilities that has to be built somewhere else. And in many cases it tends to be built in the spreadsheet if they’re not using the application that’s intended for it. So you end up driving automation through more manual processes to get the functionality to make it work. So really leveraging the systems and the tools that are appropriate for being able to manage your cash is really important. And knowing the roles and being able to, uh, be able to serve your view of current and future cash is important as well.

Madhurima Gupta (09:56):
And you know, just to talk a little bit more about the market conditions, um, inflation is on, uh, you know, all time high. Uh, we are, you know, already facing recession and I mean it’s gonna probably get, uh, even worse in 2023. Um, so in such scenarios, why is it critical or would you say it is critical to have real time creditors data access to secure cash flow?

Paul DeCrane (10:20):
Yes, I would say it’s critical to have near real time cuz nobody. I haven’t seen the world, uh, really kind get to a real time position. So near real time I think is is important. Um, real, real time would be ideal, and the reason I say that is there are challenges in working with the banks, uh, for connectivity reasons. There are challenges with in-house data infrastructures to be able to get the cooperation, uh, especially in a global, in a global organization to get the data and information from timezone to time zone on a recurring basis as real time as possible, uh, right now. So I think there are designs and architectures that, uh, systems that can and have the ability to give real time views, but, uh, generally it’s that structure that creates the problem for getting full real time views and really near real time is, is often sufficient as well. But for intents and purposes, I I just wanted to make that distinction between, um, real time and near real time. I think it’s ideal, uh, to have real time, but in absence of real time near realtime is, or in today views is really important as well.

Madhurima Gupta (11:39):
Absolutely. And with the, you know, with the same economic conditions, um, you know, historically the baseline data that a lot of companies may have maybe in inaccurate now because, um, different industries are affected differently, whether it was by covid or now by economic distress. Now, uh, with such, uh, vulnerability, how can treasurers forecast cash, uh, effectively in, in this Scenario?

Paul DeCrane (12:08):
I think having a flexible process, uh, with, um, good access to, to data and information to give you that starting view and that historical vantage point across clients, across customers, across your receivables base. Also understanding from a payables perspective what your outflows are, the timing of outflows, how you can handle those outflows differently and, and the way that through a shared service environment or some type of, of payment hub that a lot of these companies have, how that’s handled operationally, I think it’s really important. So having this holistic view of the, of the revenue cycle as well as the cash cycle is really important. And it starts with the revenue cycle and then is translated into the cash cycle. I would say there are challenges when it, when you introduce market volatility to how information comes through and match that up. So just to give you an example, if you’re expecting, you know, $1 million and, and US dollars to flow into an account on a particular day and it needs to be moved to a Euro account, uh, you know, the exchange rate, uh, in a heavy volatile day can really have an impact on what the pull through on that funding is. Um, and, and the timing of being able to pull it through as well. So the market data is also important and being able to understand what your expectations could be and to be able to offset some of that risk, uh, in your funding and in your cash cycle, uh, in order to be able to make sure that you can, you’re making all your payments on time, but you’re not sitting on so much cash in a very expensive funding environment where it’s really, um, really becoming somewhat cost prohibitive to how you operate.

Madhurima Gupta (14:00):
And, um, what, according to you should be the top three metrices that, um, you know, CFOs should be looking at to gauge, uh, cash flow health in 2023?

Paul DeCrane (14:10):
Yeah, so I would say as you look at cash and liquidity, I’d say the, the top three measures should be number one, um, being able to see all your cash at any particular time on over the course of a day. So it’s more of a soft KPI of having full visibility to, you know, 90 or a hundred percent of your cash across the globe. Number two would be being able to forecast it for one to two weeks, um, being, having some level of, of accuracy. And when I say some level, you want a high level of confidence. So anything over, you know, on, on 90, 80% of your cash, having the 70 or 80% AC accuracy in view is really important. A lot of companies can’t get there, but having some level of comfort on coverage is also important. So, so I think cash coverage, uh, is also a, a very important, uh, view as well. I think last of all, uh, so aside, moving away from the, the view of, uh, forecast accuracy, it’s also being able to have capacity, so cash flow capacity. So I, what I like to call is contingent funding resources available and contingent resources available, uh, within a specific range of volatility. So generally from a KPI perspective, what that would equate to is what’s the maximum volatility in your cash and are you covering it with contingent resources, which equals current cash plus available capacity that you can get from finance options such as, you know, whether it’s supply chain finance, whether it’s abl, uh, receivables finance or factoring facilities as well. So that cash coverage ratio I think is really important in highly, highly volatile times.

Madhurima Gupta (16:03):
Absolutely. And in your opinion, uh, which is the most important, uh, pillar at, uh, at your office for optimizing cash flow? Would that be people, process, technology, collaboration? What would it be?

Paul DeCrane (16:17):
So I always, I always view process as a leading capability with technology enablement. You could have a great technology tool, but if people aren’t using it, it becomes really difficult to, to perform well against, against what you’re trying to do. So against your mission and in this case would be cash pull through and increasing the velocity of cash through your working capital cycle. Uh, so I, I think it’s process first and with it, the process doesn’t have to be perfect, but it has to be good enough to enable the technology. So I, I think, um, I think those are the two primary leaders, so it goes hand in hand and then a good data and information architecture needs to be in place too. And that’s the process around technology, which I’ll call the third derivative. That’s also important as well.

Madhurima Gupta (17:10):
Absolutely. And in your opinion, how is emerging technology going to shape the future of CFO’s office by 2025?

Paul DeCrane (17:19):
I think it’s going to be, it’s gonna differentiate the industry leaders versus the industry laggards. So the CFOs, and one of the things that I, I’d like to emphasize here is, and, and, and it’s philosophical and it’s thought provoking, but my view is if a treasurer’s doing their job, all treasurers should be the head of corporate finance. And what does that mean? That means from a capital markets perspective and from an internal operations view, uh, that the treasurers should be able to, to tell the CFO where the funding, and I looked at the treasurers, the air traffic controller, if you will, of, of cash, they should be able to tell ’em where funding will be at what time, and then also ask if they need more funding based upon growth initiatives based upon planning, which would be in your fp and a group. So I think having technology at the middle of that, it’s impossible to do, uh, treasury’s a conduit to the rest of, uh, the organization in order for treasury to have a good view on how they can provide good consulting to the organization, how to fund, they need to understand the business objectives, initiatives, and the performance of their clients. So, long story short, automation is critical to being able, or I’d say technology is critical to being able to accomplish that. And that information is critical to the CFO being able to make business decisions going forward on where to invest, how to invest, and what are the leading or lagging performing components of their company.

Madhurima Gupta (18:52):
Absolutely. That comes to the end of this particular interview flow that I had for you. Right. Uh, and I really appreciate you sharing your opinions on me. So thanks once again, uh, Paul, I, I hope that you had, uh, fun having this conversation with me as much as I did. Then our listeners out there, stay tuned. We’ll be back with more.