Although treasury and FP&A both generate forecasts, their objectives are different, and so too are their general approaches to forecasting. Yet, by working together, treasury and FP&A can develop more meaningful forecasts to support the development of business strategy. There are potential benefits from a collaborative approach in a number of areas:
- Scenario modeling: Treasury’s ability to provide more detail about how individual cash flows behave under stress will help to enhance the accuracy of the models used by FP&A to build long-term forecasts. FP&A will be able to model the impact of various potential strategies on cash with more confidence and help to identify risks that threaten the achievement of corporate objectives.
- Operational enhancements: Companies want to optimize their use of cash and working capital. Operational improvements within treasury can help, with possible improvements being the adoption of standardized payment processes and increased automation within workflows generally, which will both help to lower costs and reduce the risks of error and fraud. FP&A often serves as a finance business partner with teammates embedded in the business, and therefore can share with treasury early warnings of potential disruptions. FP&A is tied very closely with operational goals and metric performance because they lead to income and cash impacts.
- Supply chain efficiencies: Insight from treasury in terms of payment patterns along the supply chain can help to support the ongoing review of supply chain resilience. Companies will be looking at a range of factors when assessing their supply chains including customer and supplier creditworthiness and logistics, both on the procurement and sales sides. Any problems along the supply chain will likely have cash flow implications. Treasury can help the business act to both identify and manage those risks.
- Borrowing base: Treasury’s understanding of the obligations arising from different types of borrowing (e.g., bank, asset backed, capital market) will help to inform models around the preferred capital structure to ensure an appropriate balance between debt and equity. Treasury can also help to structure any borrowing to avoid unnecessary stress when servicing and repaying the debt. FP&A then uses the cost of capital calculation in its decision and project valuation models.
- Risk management: Treasury can support FP&A by identifying financial risk exposures and any natural hedges in different scenarios and potential business strategies. Identifying risk exposures before a strategy has been adopted can help to give context when evaluating the potential returns and also allow the company more scope to manage those risks if the project is pursued. This is important because the basis of corporate finance is the concept of creating value in excess of the cost of capital, or alternative use of that capital. FP&A links to risk management because they are constantly assessing uncertainty and volatility as they seek to forecast and project financials forward.
Download the guide, Treasury Opportunities in Strategic Cash Forecasting, underwritten by Kyriba, to further explore the fundamentals of strategic cash forecasting, and how treasury can collaborate cross-functionally with FP&A and other finance teams to plan for their organizations’ futures. Download the guide.
The coronavirus crisis has highlighted the importance of integrating fast, informed planning to strategically and tactically align finances and operations to react to risk events. By working together, treasury and FP&A can enhance their forecasts to support the growth of their organizations.