Liquidity Planning: The CFO’s Guiding Compass for 2023

While there is much to look forward to in the new year, many critical issues are sure to make cash and liquidity management a massive challenge for CFOs. The end of the “cheap money” era, an inflationary environment, a looming recession, a resurgence of COVID-19, FX volatility and more will produce tough challenges for finance chiefs in 2023. But with liquidity planning practices and technology, CFOs can turn those challenges into opportunities.

Liquidity Management Challenges for Finance in 2023

Macroeconomic factors and underlying uncertainty will keep CFOs on their toes throughout 2023. The following list of key finance responsibilities are currently seeing a major impact:

• Cash Flow and Liquidity Management: An uncertain market with more expensive capital and higher costs of liquidity will force CFOs to be shrewder than ever with organizations’ cash flows and liquidity instruments. Accurate capital planning will become increasingly difficult as longer-term projections and forecast accuracy will require liquidity solutions to help aggregate and deliver better decision support for the CFO.
• Risk and Compliance Management: CFOs have always been responsible for governance of managing financial risk and compliance in the organization. With the new settings of hybrid/remote work culture, increasing cyberthreats, current geopolitical unrest and increasing ESG focus, this aspect of the CFO’s job has become even more important. It involves a plethora of responsibilities ranging from business continuity to cybersecurity and payments fraud prevention to supply chain stability through working capital management.
• Advancing Digital Transformation: According to a recent global survey by Everest, 70% of CFOs have identified investment in digital technologies as their top priority. CFOs are usually the executive sponsor behind launching digital transformation projects that identify critical processes to improve. They then select and sign off on solutions that uplift those processes to strategic levels and provide much needed access to KPIs/data insights swiftly and accurately.
• Talent Retention: As the role of CFOs and finance departments has widened, finding the right people with the right skillset (soft skills with forward looking outlook, functional and business skills, analytical and digital skills) has become a critical challenge. In addition, the great resignation has further exacerbated the matter, with the additional costs of replacing talent.

While these challenges demand a stronger strategic mindset, less margin for error and greater agility to adapt for rapidly changing conditions, they also present opportunities to get ahead of the pack and gain a competitive edge in the marketplace. A common solution thread for these challenges, and one that can build a competitive advantage, can be found in liquidity planning. This practice involves embedding liquidity components into cash flow forecasting. Driving closer ties between cash flow forecasting and liquidity planning provides CFOs with opportunities to be even better strategic partners to CEOs and boards of directors.

Overhauling Cash and Liquidity Management

Embracing an appropriate digital solution will help dramatically improve cash flow and liquidity management while also making risk management and compliance enforcement easier. Additionally, eliminating time-consuming and low value-added activities such as data gathering, consolidation and report building, while providing powerful analytics, will enable finance talent to grow and become better strategic business partners.

Below are a few areas that the CFOs should focus on while revamping cash flow and liquidity management:

• Real-time Cash Visibility: Before the pandemic, many organizations viewed cash flow forecasting as just another periodic financial report conducted weekly or monthly. However, 2020 brought cash forecasting to the forefront of what the C-suite and boards needed. Updating cash flow daily, if not multiple times a day, is a must. As we begin a volatile 2023, it is very clear that a real-time liquidity planning process will help organizations proactively navigate uncertain macroeconomic and business events.
• Forecast Accuracy with Multiple Scenario Planning Capabilities: Another lesson learned in the pandemic was the necessity of highly accurate and near real-time cash flow and liquidity forecasts. There are two parts to building a quality cash flow and liquidity forecast. The first is the accuracy of the historical enterprise data collected from multiple sources in the organization’s ecosystem. A solution enables this by providing the dynamic capability of easily slicing and dicing the data into underlying granular information to avoid an opaque consolidated view. Second is the effectiveness in predicting the future states under different scenarios. A prudent solution for this conundrum is advanced “what-if” scenario planning, which utilizes capabilities such as embedded data visualization and AI for predicting when a customer is likely to pay its bills.
• Cash Flow Improvement Programs: With external financing getting scarce and expensive, CFOs will need to look increasingly within their organization to generate free cash flow for funding the business. Digital solutions that can provide real-time visibility into cash flows and the cash conversion cycle are the first step. This needs to be followed by a phased approach to improving cash conversion KPIs, such as DSO or DPO. Improving these KPIs can release millions of dollars trapped in working capital. CFOs can either launch or expand a factoring program to lower DSO or initiate or expand a supply chain finance initiative that can help optimize DPO for the organization. In 2023, these programs will need to be systematically unified and integrated into a more holistic and enterprise-wide cash flow forecasting and liquidity planning initiative. This will enable a 360° view of all liquidity levers, with reporting and compliance capabilities and advanced analytics to optimize decision-making. This can only happen if the organization is leveraging a single and purpose-built enterprise liquidity management platform.

CFOs Take the Lead

The new year is already rampant with uncertainty and cynicism. The International Monetary Fund recently released its outlook for 2023, projecting weak growth globally. CFOs have a long road ahead of them, but with the right mindset, solutions, and proactive approach, they should be in a better posture to lead their organization through these turbulent times and emerge as frontrunners in the new economic marathon. Knowing when to run faster and when to slow down will be a significant difference maker. Learn more about Kyriba’s commitment to leading liquidity management and better decision-making for the CFO.