Cash Flow Analysis: The Treasury Perspective

Cash Flow Analysis: The Treasury Perspective

Written by 
Trovata
March 22, 2021

The purpose of cash flow analysis is to understand how cash moves in and out of an organization, enabling decisions that better support business operations. The Treasury division, the professionals at organizations who manage their company’s cash, has an important perspective to offer. Treasurers have unique visibility into available cash—including virtual accounts, regular accounts, assets, and liabilities— as well as historical and seasonal trends in how cash moves through the business. 

This direct view, combined with a treasurer’s expertise in business cash management, can result in better utilization of a company’s cash. It can also identify risks that might be missed in other, more indirect, approaches.

Since treasurers are focused on cash, they’re better able to analyze how cash has moved through the company. They know:

  • Where cash has left the company (cash outflows), historically
  • Where cash has left the company, recently
  • How cash has come in (cash inflows), historically
  • How cash has been coming in, recently

By combining what they know about the business, the marketplace in which they work, and their expertise in cash management, treasurers have a unique perspective on:

  • Where cash will be leaving the company in the future
  • How cash will be arriving in the future

The historical data and future-forward examination of company cash flows results in valuable insights that are only available from comprehensive, timely treasury management practices and technologies.

Treasurer’s Cash Flow Analysis and Visibility

Treasury has direct visibility into unique data: virtual bank accounts, traditional bank accounts, global and regional bank balances, investments, and more. The functional snapshot of a business’s operating cash is made by the treasurer.

When analyzing cash flow, the treasury department is well-positioned to take into account the actual cash flow of the business historically. This perspective can identify trends in financing activities, operating cash flow, capital expenditures, global or regional collections, seasons, payroll timing, and internal departments. Combined with a treasurer’s experience and understanding of the business, these historical cash flow trends can, through better forecasting, inform better cash management decisions.

Cash Flow Analysis and Timing - Why Real-Time is Important

One of the most important elements that treasury brings to the table is timing. Due to the importance of ensuring bank accounts have the funds required to fulfill obligations like payroll or debt repayment, treasurers work towards having a real-time perspective on cash flow.

The first view of global cash activity for the organization comes to the treasury department right when money enters or leaves a bank account. Contemporary tools for treasury measurement put this information in the treasurer’s hands, first—before accounting or other financial professionals.

Using these tools, a treasurer can:

  • Focus on cash flow forecasting at short and medium-terms, even weekly or daily
  • Automate data collection so that everything is one place
  • Regular, daily cash flow variance reporting

With these tools in their arsenal, a treasurer is able to make better decisions on investments and allocations, free staff to focus on identifying opportunities instead of getting bogged down in data collection, and quickly investigate any large variances or adjust forecasts accordingly.

Importantly, the real-time perspective of treasury results in better timing of when cash will be available to the company. This can spur collaborations with accounts receivable or accounts payable to take advantage of available opportunities without lagging behind for the month-end accounting statements.

A Direct Approach to Cash Flow Analysis

By measuring cash flow directly in real-time, the treasurer’s perspective guards against some of the common problems organizations have with cash management generally.

Here are four critical areas where organizations fall down in their cash management and how the treasury perspective can guard against them:

  1. Lack of experience and skills in cash management. 
  • Solution: Treasurers are specialized in cash flow management and hold the business portfolio for managing cash for the business.
  1. Failure to grasp the cash flow cycle. 
  • Solution: Treasurers observe cash flow directly, as it occurs, and are intimately concerned with understanding and optimizing that cycle.
  1. Mistaking profit for cash. 
  • Solution: Treasurers are making decisions while looking directly at the cash on hand, so they can guard against spending money that hasn’t yet cleared the bank.
  1. Bad investments. 
  • Solution: A treasurer knows when an investment generates cash.

Without guarding against the above situations, a company’s understanding of cash flow will be incomplete at best. A treasurer’s perspective will greatly improve the analysis and the resulting ability to seize opportunities.

Comprehensive, Real-time, and Direct

The business function of the treasury department–to execute the capital allocation strategy–refines a perspective that is comprehensive, real-time, and direct. Being able to measure real performance vs. actual bank statements increases the assurance of internal decision-makers and external stakeholders. When decision-makers have clear and timely analysis, they can shorten cash conversion cycles and improve free cash flow or take advantage of opportunities to ease future cash flow pressures.

For more information on why cash flow analysis is integral for treasurers, check out the interview with Square’s Treasurer Tim Murphy and how he thinks about managing cash.

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