6 questions treasurers should be asked

Vice president of global presales at Kyriba, Greg Person, has formed a list of six questions that CFOs should be asking their treasurers because cash flow guidance is becoming more and more important.

As it is the treasurer’s duty to ensure that the future cash flow of the company is forecasted correctly, Person says that by asking these questions, it will lead to an improvement of the effectiveness of treasury resources, a reduction in interest expense and a greater confidence from senior management in the financial department.

Here is a summary of the questions that Person consolidated:

  1. What am I solving for?

Cash flow forecasting is beneficial for the organisation and it is crucial that all departments know why this is important, how it will affect them and in turn, put effort in to make sure that the cash flow is calculated efficiently. “It is essential to define the objectives of cash flow forecast, what problems the cash flow forecast will solve and how the cash flow forecast result will benefit treasury’s customers; both internal customers including CFO, board of directors and internal legal entities who depend on treasury for adequate liquidity to support their businesses,” Person said.

  1. Am I making the same forecasting mistakes?

Errors are an essential step in the cash flow forecasting process so that the mistakes made this time are not made again, because of variance attribution analysis. “Inclusion of simple yet comprehensive variance analysis technology can often reduce the time and stress of identifying culprits of the forecast error and reduce the likelihood or repeating similar cash flow forecast errors in the future.”

  1. Do I understand my business?

Person highlights that the treasury department is responsible for keeping the relationship between external counterparties with corporate fiduciaries balanced, such as banks and credit agencies. As a company grows and new products are launched, an understanding of how treasury can help the business is vital for strategy. “From increases in inventory balances to secure a new product launch, to expansion to higher DSO regions, understanding the underlying business for which your treasury department supports is a critical step in securing an accurate cash flow forecast, and enabling treasury as a strategic internal business partner,” Person says.

  1. Why fund your business with external funds?

In order to ensure an accurate and comprehensive cash flow forecast, Person advises using internal cash rather than external financing to manage expenses at corporate and regional levels. “This enables corporations to better utilise their cash balances to pay down credit lines and short-term debt, and find external expenses and corporate capital allocation strategies including share repurchase, dividend and M&A activity, without taking on additional external debt and interest expense,” Person explains.

  1. Direct or indirect?

The treasury plays a vital role in providing liquidity planning to ensure requirements for working capital are met, alongside contributing to and measuring the performance of the cash budgeting plan. By using a financial planning and analysis (FP&A) strategy, treasurers can guide C-level employees and board members on the risks and opportunities regarding cash flow better, rather than a traditional treasury method. However, Person questions whether this way of approaching strategy can be applied to different currencies. “How does the FP&A plan translate to global currency risk management objectives and aligning global business plans to FX cash flow programs?” Person asks.

  1. Do I have real-time insight to free cash performance?

Real-time cash visibility is a hot topic amongst treasurers at the moment, as automation can help to predict in advance if targets will be met. This also means that “actionable information”, like receivable financing and supply chain finance can shorten the cash conversion cycle, as well as, improve free cash flow for the quarter, according to Person.