[caption id="attachment_378993" align="alignleft" width="178"]
Oliver Bennett[/caption]
As the COVID-19 pandemic continues to affect how companies do business, it’s even more critical for business leaders to have access to accurate cash flow projections.
The pandemic shed light on major weaknesses in the ways companies predict their cash positions. These include a lack of access to a complete view of data, as well as limited analytics for making cash flow predictions based on past history.
To combat these challenges, many finance teams are embracing new forecasting solutions that use machine learning. Empowered by treasury digitization, companies can better predict future cash needs without significant manual efforts or costly technology investments.
[caption id="attachment_416284" align="alignleft" width="191"]
Andrew Arsenian[/caption]
Here are three ways to quickly improve cash flow processes and help grow a business:
Use incoming and outgoing payments with vendors to create efficiencies. By applying a strategic approach to payments, companies can unlock hidden cash flow from day-to-day operations. This involves segmenting suppliers based on transaction value and strategic value. Suppliers who rank low in both categories are good candidates for payments through card-based products. This can improve processing efficiency, extend payment terms through a regular billing cycle and potentially lead to a rebate based on spend volume.
Where transaction volumes are high, companies could seek to negotiate liquidity and financing options. For example, extending payment terms from 30 to 60 days will allow buyers to generate substantial cash flow from the extensions, while discounting invoices for quicker payment can help suppliers improve their cash flow/liquidity position.
Improve the overall accounts receivable approach. According to PYMNTS’ B2B Payments Innovation Readiness Report, the average days sales outstanding – the average number of days it takes to collect payment after a sale – increased from 39.7 to 42.6 days within the first year of the pandemic. Many companies are reviewing and fine-tuning their accounts receivable processes to protect cash flow.
The exercise begins with analyzing each step of the billing, invoicing, receiving and reconciling payments process. This approach often provides insights into how companies can use digital solutions to improve their accounts receivable process, including accepting digital payments instead of checks to improve the speed of receipt and deposit of payments. Many businesses now offer discounts for individuals who use digital payments to incentivize customers to make a switch.
Invest in digital tools to forecast cash flow. Digital solutions can significantly improve cash flow projections, and the investments don’t have to be expensive. Companies should focus on “needed” versus “nice to have” capabilities when looking for a forecasting solution. The needs should include built-in analytics tools capable of scenario analysis with various growth rates, trailing averages and other assumptions.
Additionally, an effective digital tool should be simple to use without requiring extensive training to operate or implement. This does not mean the analytics engine will be simple; advances in machine learning and the ability to synthesize historical data are helping to forecast the future more accurately.
According to Bank of America Corp. research, most companies perform their cash forecasting on a spreadsheet. This is an enormous manual task that produces forecasts that are often outdated by the time the report is complete. Adopting digital tools can help accelerate the process of cash flow projections while increasing the accuracy of future predictions. As the economy enters an environment of rising interest rates, the ability to manage working capital will become even more critical, making the investment in cash flow projection tools more essential.
Oliver Bennett is senior relationship manager of global commercial banking for Bank of America Corp. Andrew Arsenian is treasury sales officer for Bank of America. Both are based in Rhode Island.