How focusing on cash can support a value-added finance transformation
This article was written by Greg Russo, Principal, Financial Accounting Advisory Services, Ernst & Young LLP. The original article was published by EY. You can find the article here.
Organizations seeking to transform finance should not overlook cash as they seek to create sustainable value.
Inbrief
Finance transformation efforts need to look beyond cost cutting to focus on cash as a way of creating value.
Optimizing cash-centric levers enables organizations to free capital resources to be deployed more strategically.
Achieving sustainable value through finance transformation requires a data-centric infrastructure that provides a holistic view of the organization.
Most companies have historically viewed finance transformations as an exercise in taking cost out of the organization through business process improvement or automation. But that view can be short-sighted in an era where finance teams are under increasing pressure to deliver sustainable shareholder value.
While organizations should always employ continuous improvement to drive efficiencies and control costs, transformational initiatives also need to focus on value creation. Achieving long-term financial viability requires organizations to balance cost management with investments in innovation and growth, while also optimizing cash.
Transformation efforts have historically struggled to deliver value, in part due to the difficulty of quantifying how those efforts impact the organization outside of cost reduction. Given the limited availability of data, further compounded by the relatively poor quality of that data, management teams have sometimes had a hard time drawing the insights necessary to make informed decisions; as a result, they struggle to articulate the value that can be added.
That no longer has to be the case. Rapid advances in data availability and quality, driven by advanced analytics, including artificial intelligence and other corporate technology upgrades, offer the opportunity for organizations to accelerate delivering insights and make more informed decisions. Enhanced visibility across the organization sets the stage for a true transformation that integrates financial and operational stakeholders.
Today, the best way to deliver enterprise-wide value in a finance transformation is to start with cash and leverage data. By optimizing cash-centric levers, organizations can seize the opportunity to drive enterprise-wide, value-added outcomes by extracting value through increased visibility, insight generation and freeing up cash to deploy capital more strategically.
While cash management has historically been the domain of the Treasury function, the value added from optimizing cash-centric levers extends beyond treasury, across the organization. As a result of this changing dynamic led by technology, data and analytics, treasurers have an opportunity to play a more strategic role in finance organizations, including transformation initiatives.
Focusing on cash-centric levers is integral to successful finance transformation
Extract more value from Finance transformation by optimizing operational cash and liquidity levers and connecting across the critical Finance stakeholders
Some cash-centric levers include:
This lever, requiring input from key finance stakeholders, can drive value-added outcomes that include an optimized capital structure, releasing cash from the balance sheet, improved liquidity and risk reduction.
Common challenges: poor data quality leading to uninformed balance sheet decisions and considerations; operational inefficiencies resulting in cash being tied up in working capital; complex debt structures leading to challenges restructuring liabilities.
Improvement opportunities: establishing and instituting more informed target debt and equity levels and to reduce cost of capital; investment strategies to maximize yield while providing sufficient liquidity to meet short-term obligations; operational efficiencies to improve working capital and release cash; balance sheet risk identification and mitigation.
This lever features a reporting and modeling infrastructure to monitor key financial metrics to support data-driven decisions and drive value-added outcomes, which include increased visibility into cash-flow drivers, improved forecasting and reporting accuracy, as well as insight generation to drive working capital efficiency.
Common challenges: disparate technical infrastructure and lack of visibility; disjointed ownership and coordination across key finance stakeholders; limited tracking and reporting of key cash KPIs; and suboptimal forecasting visibility and accuracy.
Improvement opportunities: leveraging advanced analytic tools to analyze cash flow and generate insights; designing optimal reporting, modeling and KPIs to enable cash strategy; and establishing a long-term data infrastructure.
This lever relies on using a data-driven approach to identify, quantify and assess risks and associated risk KPIs to reduce volatility in earnings and cash flow, enhance decision-making, and risk reduction.
Common financial risk management challenges: accurately identifying, tracking and quantifying FX exposures; managing FX volatility; inadequate technology and systems to monitor risks and manage hedging effectively; cost of hedging programs.
Improvement opportunities: establishing scenario and impact analysis to support optimal hedging decisions; defining hedge strategy objectives; establishing reporting infrastructure for execution and KPI management; documenting policy, procedures and controls across critical finance stakeholders; and performing business exposure identification.
This entails establishing a strategy for implementing and improving enterprise-wide cash processes and cash and liquidity structures. It features standardized roles, responsibilities and procedures that drive value-added outcomes, including cash optimization, cost reduction, business process efficiency, greater scalability and risk mitigation.
Common challenges: inefficient cash pooling, liquidity and intercompany structures; outdated and/or inefficient business process, leading to wasted time and resources; lack of visibility into processes, leading to challenges with continuous improvement programs; disparate systems and software, leading to silos and process bottlenecks; a lack of process standardization, leading to errors and inefficiencies.
Improvement pillars: modernizing cash and liquidity structures to drive cash efficiency; detailed process documentation and standard operating procedures to streamline and reduce process risk; and utilizing process management tools and software to automate workflows and free up employee time for value-added activities.
An optimized banking strategy will deliver value-based outcomes such as reduced operational cost; increased treasury productivity; improved working capital; more informed decision-making; optimized value across an organization’s banking network; and risk reduction and fraud mitigation.
Common challenges: suboptimal bank account structure; manual processes such as bank reconciliation, cash positioning and reporting; too many bank accounts and banking partners; and increased fraud risk due to inadequate control frameworks.
Improvement pillars: optimizing banking fees through bank account rationalization and more competitive pricing for banking services; diversifying banking partners to minimize counterparty risk and to optimize the banking network; leveraging bank partners effectively for risk reduction and fraud mitigation; and more effective leveraging of bank data to garner insights.
Building out the technology infrastructure plays a critical role in a transformation by enabling more efficient sharing of data across various finance systems and by leveraging the technology to streamline and automate processes. Technology is the foundation of any transformation, and in addition to enabling all cash levers, tech will deliver its own value-added outcomes that include improved visibility, FTE time savings and cost reduction, and a decrease in operational risk.
Common challenges of outdated technology: inadequate system integration across the broader technology infrastructure; under-utilized and outdated systems leading to manual processes and workarounds; non-conforming, inconsistent data that hampers modeling and report construction.
Improvement opportunities: fully integrated system infrastructure to support cash reporting and analysis; leveraging treasury management system and other technologies to perform advanced analytics (cash flow forecasting, exposure identification, etc.); and creating a “central source of truth” for cash reporting across the Finance function.
Value-added benefits of finance transformation
Cost reduction will always be a key goal of the Finance function. And while episodic cost-cutting efforts can be an important outcome of a transformation initiative, they require continuous improvement programs to maintain. Finance transformation efforts that focus on levers to deliver value creation can have a more significant impact for stakeholders. Outcomes that can be derived from focusing on these cash-centric levers can be truly “transformational,” but the transformation comes from data, leveraging modernized technology and advanced analytics. To further the transformation, organizations also need to move forward with plans to deploy contemporary liquidity structures, improve bank connectivity and then integrate purposeful process improvement and standardization into the organization.
Breaking down key cash levers and value quantification
Lever
Balance sheet strategy
Process standardization and improvement
FX risk management strategy
Advanced cash analytics
Banking strategy
Technology stand-up and enhancements
Description
Working with critical Finance stakeholders (e.g., business unit Finance, FP&A, Treasury) to establish target capital structure and long-term strategic plan
Establishing infrastructure to monitor and manage balance sheet KPIs
Establishing a strategy for implementing and improving enterprise-wide cash processes: intercompany structures, cash pooling, payments, etc.
Standardizing roles, responsibilities and procedures across key processes and critical stakeholders
Using a data-driven approach to identify, quantify and assess risks and associated risk KPIs
Establishing operating model across critical Finance stakeholders to drive enterprise risk strategy
Establishing the reporting and modeling infrastructure to monitor key financial metrics
Making data-driven decisions to enhance overall financial performance
Implementing drive-based liquidity forecasting to identify operational cash drivers and proactively identify liquidity shortfalls/surpluses
Optimizing banking fees through bank account rationalization and driving toward competitive pricing on banking services
Diversifying banking partners to minimize counterparty risk
Establishing the technology infrastructure to enable usage of data across various Finance systems
Leveraging technology to streamline and automate processes
Example value quantification
Improved return on capital
$X incremental capital * realized return
Improved cost of funds
$X ST borrowing reduction * base ST borrowing rate
Improved risk-adjusted return on capital
[Return on investment – risk-free rate] / [reduced investment risk]
Improved DWC
[Reduction in average net working capital / revenue] * days
Reduced banking fees
Reduction in no. of accounts * average annual fees
FTE cost savings
FTE cost * # of hours saved
Outcomes include:
Debt reduction
A more efficient capital structure
Enhanced yields
Tax efficiencies
Minimized earnings volatility
Improved working capital
Decreased operational risk
Enhanced returns
Improved forecasting, reporting and insight generation
More strategic deployment of cash
Transformation efforts should focus on value-added outcomes. Those that myopically focus only on cost-out will risk falling short when it comes to creating shareholder value. Finance organizations should start by identifying outcomes that create value and then build a roadmap to execute on the levers needed to deliver.
To that end, an increasing number of organizations focused on value creation are opting to move forward with a more balanced approach to transformation that considers both improving cash and balance sheet efficiency while also taking out costs. Finance transformation initiatives should be tailored to the unique context of the organization, with a clear understanding of how each focus area impacts the overall strategic objectives.
Finance transformation touches the entire enterprise
By its nature, a major finance transformation should have a broad reach across the enterprise. To secure a lasting impact, however, Treasury should seize this opportunity to play a more strategic role, particularly by leading a “cash culture” that encourages all employees in the organization to improve cash flow, deploy cash more strategically, enhance cash controls and mitigate risk. To extend its reach throughout the enterprise, the organization may also want to establish a “cash leadership” office that views cash on an equal footing with revenue and profitability, says Peter Kingma, EY Americas Working Capital Leader.
A strategic Treasury department should integrate itself with the rest of Finance to provide greater visibility to operational cash data to provide insights across the organization. Treasury is operational and produces data or consumes data produced by others daily. Finance teams should harness this data and partner with Treasury to drive value across the organization.
Advanced cash analytics, for example, can unlock additional benefits for FP&A by mapping operational cash to financial cash, providing insights into free cash flow that can help triangulate a short-term or long-term forecast, provide insights into strategic planning, or support more informed external guidance setting.
Similarly, controllership stands to benefit from levers that can streamline cash processes, deliver automation and improve cash controls. For example, technology enhancements to treasury systems can improve downstream accounting processes and provide efficiencies during the fiscal close. These streamlined processes enable more efficient bank-to-book reconciliation and a standardized finance operating model that improves controls around critical cash processes.
Data is the key, and technology underpins the entire transformation
Bottom line, the increasing importance of data elevates the role of technology in a finance transformation. Technology advances are enabling the acceleration of the Finance function as a more strategic partner, and Treasury is at the forefront.
Robust technology platforms enable organizations to deploy a fully integrated system infrastructure that is “data-centric” as opposed to “system-centric,” enabling access to data that supports holistic reporting and analysis. Coupled with tools to support advanced analytics such as machine learning and artificial intelligence, along with other modernization efforts such as robotic process automation, advances in technology are driving more informed decision-making and process enhancements that organizations can leverage to deliver value-added outcomes.
Conclusion
While cost-cutting can deliver significant financial benefits, an exclusive focus on cutting costs misses the boat in a Finance transformation initiative. It’s also important to remember that stronger cash management and achieving cost reductions are not mutually exclusive goals. An enterprise that embraces a robust cash and balance sheet strategy — and elevates cash so that it occupies an equal playing field with other key financial levers1 — will typically position itself for more sustained value creation. As such, finance organizations that focus their transformation programs on value creation by targeting outcomes that can be achieved by optimizing cash-centric levers will position themselves for long-term success.
An often overlooked yet powerful benefit of a transformation is the unleashing of innovative creativity within the finance organization. A well-designed technology and data ecosystem built to support organizational finance objectives will yield tremendous benefits. Finance professionals will find themselves liberated from inefficient and boring tasks related to managing and manipulating data. Instead, they will be able to focus attention on the strategic value that finance brings to the organization, inspiring fresh ideas from those with an innovative streak. Enabled by a data-oriented approach, the freedom to create will energize finance teams, unlocking what is still the most powerful value creation lever: the human factor.
1 Peter Kingma, EY-Parthenon Americas Working Capital Consulting Services Leader, The Better Finance Podcast, January 2025.
Summary
An increasing number of organizations seeking to embark on a finance transformation are opting to move forward with a more balanced approach that considers both cash and balance sheet efficiency while reducing costs. To be effective, finance transformation initiatives should be tailored to the unique context of the organization and take into account how each area impacts the organization’s overall financial health and strategy.
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