Mistake #1: Profits are a dream, but cash is a reality
Too many organizations are focusing on EBIT, revenue growth, gross margin, and other financial statement elements from the balance sheet or income statement. However, cash flow is a hard reality that CFOs tend to look at last, which is a critical error. In 2023, cashflow management and optimization will be vital given the macro & micro economic, political, and social variables.
How to solve the mistake?
Truly measure cash flow by understanding the ins and outs of your cash, not by bridging your EBIT, EBITDA, or net income to cash flow. A daily net cash flow statement from a direct perspective is the first place to start. It should be the #1 metric for your daily review, to see how you can manage expenses and short-term investments.
Mistake #2: Not focusing on cash flow forecasting precision within a 90-day window and accuracy after 90 days
Follow the principle of 13 weeks rolling forecast with an 85% – 95% confidence interval. Also, perform the variance analysis on your forecasts on the actual vs forecasted data and any variance of 25%-40% should be directly accurate. Cashflow forecasting is a big opportunity for CFOs to make an immediate impact on scaling and investing opportunities.
How to solve the mistake?
Map and aggregate every dollar coming out of your organization. Yes, look at existing accounts receivable and DSO to get precision on cash inflow and what your non-negotiable cash outflows are, i.e., rent, salaries, contractors, healthcare, etc. Again, the goal is precision within the first 90 days of your
cash flow forecast and then accuracy after 90 days. Take the help of technology to run rolling or fixed forecasts for you!
Mistake #3: Lack of clarity & collaboration in your record-to-report
Do your sales, customer success and other revenue-generating teams understand how finance brings value to the contract management process? Do sales know the ideal customer contract to sell?
These are all important questions that finance should be partnering with the business to proactively drive clarity and collaboration in contract management. In my experience, contract management is a greenfield opportunity to make contracts easier for customers, finance, and all internal business stakeholders. Optimizing your contract management process has a big impact on the R2R process.
How to solve the mistake?
Identify the full workstream of our contract management process, literally from the beginning until the end by:
- Identifying all stakeholders
- Identifying any bottlenecks in the processes
- Keeping track of any documents, reports, and systems used through the process
This will help you establish the baseline process and then future state which incorporates more clarity, collaboration, and connection. The goal is for everyone to understand the baseline and the future state of the contract management process.
Mistake #4: Month-end close process that takes longer than five business days
Month-end close is an accounting process that ensures all accounting transactions have been recorded for in the previous month. This is the most crucial foundation process for all high-performance finance teams. According to a 2021 survey by CFO.com, private companies typically have an 8–10 business day month-end close, and public traded companies tend to have a 3–5 business day month-end close. Also, exceptional finance teams can close the books in 1 business day.
How to solve the mistake?
As mentioned in the contract management process above, performing kaizen around your month-end close is vital. What is Kaizen? Kaizen is a strategy where business stakeholders work together to proactively map, continuous improvement and incremental efficiencies from key business processes. As it relates to a month-
end close process, this is helpful because accounting, finance, and business teams can see what happens if this information, process, or report isn’t completed on time and how it affects other areas of improvement.
Identify your current month-end close process. Then plan your ideal state. Also, it's beneficial to show this process visually so everyone can see the full baseline and ideal processes. Finally, there are some interesting financial close digital tools in the market that you can explore to do away with the manual work.
Mistake #5: Not having control over your order-to-cash process
Order-to-Cash must be one of the most efficient processes for CFOs and finance teams. Why? Because this is seriously how your cash comes into the business. As mentioned in mistake #1, you need to have a mastery level of confidence and control over expected cash inflows. CFOs tend to focus on top-level revenue growth which is important, however, even more important is how that revenue growth will translate to cash in the bank. Basically, how much revenue growth will convert into cash inflow growth as well.
How to solve the mistake?
Understand the different handoffs in the order-to-cash process and where those handoffs could create inconsistency, lack of clarity, or confusion. Also, another important metric for CFOs is translating incremental or decremental revenue into how that affects your current and future cash position. For example, if you are inputting a revenue growth of 10% into your 12 months revenue model, which is $10M, you need to be cognizant about how much of that $10M will translate directly into cash within the same period. This is an area where most CFOs stop because they see the top-line growth and they are satisfied. However, you must go deeper and rest only after the full process results in cash in the bank.
Again, there are technical solutions that can help you do these scenario analysis on your forecasts on dimensions of amount, time and FX rates.
