CFO’s guide to using an automated cash flow management system

Cash flow management helps track the cash flows of a company. It provides a comprehensive picture of cost vs. revenue. It also ensures that the organization can take care of expenses while making a profit. CFOs, business managers, and corporate treasurers are often in charge of an organization’s overall cash management strategy, stability analysis, and other cash-related tasks.

According to a U.S Small Business Administration survey, insufficient capital is the second reason small businesses fail. Regular analysis of business finances ensures the projection of future cash flow. It also helps use these business insights to keep businesses afloat.

The traditional approach to cash flow management

The finance industry has come a long way in operational growth. But treasury management systems (TMS) cannot fully meet current expectations and adjustments.

Most businesses struggle to keep up with a complicated accounts receivable and payable system and various banks and lenders.

The traditional approach of generating cash flow statements is time-taking because of:

• The complexity of the process
• Manual population in spreadsheets
• Disparate sources
• Gaps in cross-departmental communication

What are the consequences of using the traditional approach for cash management?

The following are the consequences of using a manual cash management system:

1. Late or missed payments
   If unpaid invoices start piling up, the organization may have a cash flow problem. Paying business invoices can be daunting if the funds are not immediately available. Late or missing payments due to lack of administration or cash can result in a low business credit score.
   It limits the ability to:
   • Secure financing
   • Get suppliers
   • Develop partnerships
2. Negative cash flow
   While many business owners keep an eye on cash flow, a sudden financial crisis can soon become a concern. Generating enough revenue to cover the costs when this happens is complicated. As a result, it’s vital to take as many measures as possible to ensure that treasury teams are ready for such situations.
3. Struggle to meet financial obligations
   Liquidity management has to be frequent if financial commitments are a monthly struggle. Manual cash flow management hinders firms from setting payment terms to pay their outflows.

Importance of cash flow management in businesses

Maintaining a healthy cash flow in a business is essential for its growth and survival. Nonetheless, cash flow is a constant problem for small businesses. Around 60% of small business owners believe cash flow has been a problem for their growing business, with 89% claiming that these issues have negatively influenced the company.

Reasons why managing cash flow is important:

1. Ability to carry out better planning and decision-making
   Knowing the exact cash position at any instant is critical since all business plans and decisions need reliable data backing. If cash flow is not managed efficiently, a firm risks making poor judgments that put it at risk.
2. Understanding cash outflows
   Proper cash flow management techniques ensure a better understanding of account payables, which aren’t visible on the profit and loss statement. Using cash management tools helps to uncover cost-saving opportunities in a company.
3. Protecting business relationships
   When experiencing cash flow problems, paying suppliers might be a problem. This shortage of cash could jeopardize business relationships with clients and the company’s reputation. Planning ahead of time is useful to avoid dealing with many invoices or bills all at once.
4. Expanding at the correct time
   Growth demands substantial amounts of money. Before money starts flowing in, stocks are purchased, buildings are rented, personnel is hired, and computers are procured. If companies don’t have funds to match growth, problems start rising. Cash flow management tools provide businesses with the necessary insights to find the appropriate time and money required for business expansions.

Many businesses suffer due to inadequate cash flow management techniques and systems.

Some of the significant reasons why a cash management system fails are:

1. Poor understanding of the cash flow cycle
   Cash management entails having a firm grasp of the timing of each cash transaction. It tells a business when to pay outstanding debts and when to buy inventory. Firms’ rapid growth may lead to cash crunches due to over-buying inventory but not getting paid for it.
2. Lack of understanding of profit versus cash
   Firms may profit on the income statement while facing a loss on their cash flow statement. A growing business needing a large inventory may get income but not have positive cash flows since generating revenue does not imply receiving cash.
3. Lack of cash management skills
   Managers must lead the implementation of cash management systems since they have the appropriate expertise to understand all aspects of cash management.
   These abilities include:
   • The capacity to maximize and manage working capital
   • A thorough understanding of accounts receivable
   • A real-time perspective of current liabilities
   • A deep understanding of the cash reconciliation process

   Acquiring the essential skills to manage cash flow involves dedication. It includes putting in place methods to ensure the collection of receivables on time. And ensuring money for accounts payable is not disbursed before it is necessary.

4. Lack of an automated technology
   Centralizing and automating cash management activities can be complex with varied data sources. The absence of a centralized cash flow management system can hamper cash operations. A cash flow management tool helps synchronize, standardize, and automate diverse systems.
   It enables treasurers to divide time into more strategic tasks by:
   • Automating data gathering
   • Automating reporting and data analysis
   • Automating bookkeeping and tracking of all transactions
5. Bad capital investments
   Firms may invest cash in projects that don’t provide anticipated ROI to justify it. In this situation, the assets are a net drain on the cash flow statement and the company’s cash balance.
6. Inaccurate bank reconciliation
   Manual bank reconciliation can result in entry errors. Consolidating, entering, and validating bank data consumes time. Treasurers could better spend this time on strategic activities.

   The two most significant challenges in the reconciliation process are payment processing timeframes and the lack of information provided with payments. Businesses can eradicate these with the help of automated cash flow management software.

Reasons for CFOs to use automated cash flow management system

1. End-to-end cash visibility with automated bank integrations
   An automated bank statement processing and reconciliation:
   • Saves time
   • Eliminates errors
   • Frees cash managers to focus on higher-value duties
   • Helps treasurers become strategic assets to the company
2. 360-degree view of business finances
   A unified picture of available cash across various entities and currencies helps by:
   • Optimizing cash use
   • Understanding cash movements
   • Identifying discrepancies
   • Boosting cash flow management
3. Automated reconciliation of cash balances to prior day cash activity
   Auto-reconciliation of bank statement items finds and resolves problems based on:
   • Manual matching
   • User-defined tagging
   • Matching rules and auto-cash transaction creation

   It helps maintain account level status of bank connectivity, balances, and reconciliation status.

4. Global data repository for cash transactions
   Global cash visibility and automated reporting provide stakeholders with critical information. Many users can access data from anywhere at any time to improve collaboration and planning.
5. Bank account signatory administration
   CFOs can track and manage accounts and other types of signatories through:
   • Manual entry or bulk import
   • Bulk edit and delete ability to update many signatories at once
   • Track approval limits and different signatory groups and types
6. Tracking of intercompany transactions and notional pools
   CFOs can manage notional and physical cash pools with ease to get:
   • Real-time intercompany balances
   • Intercompany loan records
   • Interest computations
   • Advanced reporting through seamless in-house bank integrations

What are the benefits of a cash management system?

CFOs should implement automated cash flow management software to get data-backed insights. A cash flow management system helps in strengthening cash management. This is crucial in the face of market fluctuations and business expansions.

The HighRadius cash management software provides CFOs with:

Client Success Stories

A construction company working across 900+ active projects chose the HighRadius Treasury suite. They wanted to gain continuous visibility and avoid cash crunches. HighRadius gave them the following benefits:

• Time savings of over one month per person every year to focus on more strategic tasks
• Data-backed insights into various cash flow categories with variance analysis
• Improved debt decisions with short and long-term visibility for 900+ projects
• Higher confidence due to accurate & timely reporting
• Up to 85% accuracy in forecasting Accounts Receivable

An automated cash management tool helps companies identify the areas and periods of cash surpluses. It assists them in planning ahead of time by collaborating with various teams. Efficient cash management improves a CFO’s decision-making abilities with real-time cash positions. A cash flow management tool gives data-backed business insights. Also, treasurers can understand their balance in revolvers and lines of credit. This helps avoid reactive decisions that result in overborrowing, penalties, and non-optimal business investments.