Cash Flow Management System: A Solid Foundation for Your Business’s Growth

Cash flow management entails keeping track of the cash flowing into your organization and comparing it to expenses. If done correctly, it provides you with a clear view of cost vs revenue and guarantees that you have enough money to cover your expenses while still turning a profit. Understanding your cash flow will help you forecast business profits more precisely and find investment opportunities.

How to manage cash flow with Proficiency

A company’s greatest resource is cash. And a skilled treasurer assists a company in keeping an eye on the overall health of the company’s cash flow. It also helps in being better prepared to deal with difficulties when they arise. This is possible through efficient and accurate cash flow management.

Cash flow management helps optimize current assets and liabilities by systematically:

• Planning
• Monitoring
• Controlling collections
• Expenditures
• Account balances

It helps treasurers collect and retain the information required to use available funds effectively.

The best-in-class ways for managing cash flows are:

What are the factors affecting cash management

The factors affecting cash flow management are as follows:
 

1. System redundancy and huge bank volume

   The volume of transactions handled by systems and banks tends to increase as businesses grow. As a result, most companies struggle with viewing cash flows at global and entity levels.

2. Multiple currency settlements or transactions

   Cross-border receivables can be expensive and difficult to manage if adequate protocols aren’t in place. The three main types of cross-border receivables issues for which changes in currency rates lower profit are:

   • Reconciliation
   • Complex currency issues
   • Subpar payment terms
3. Lack of standardization, centralization, and automation

   Handling cash management operations can be very challenging when numerous banks, ERPs, and payment systems exist. Lack of standardization results in inconsistent tech environments, inadequate risk management, and business complexity. Decentralization also leads to sluggish decision-making and delayed reporting.

4. Inability to interpret the company’s financial cycle

   In some cases, the income statement may show a profit, but the cash flow statement shows a loss. This happens because producing revenue does not guarantee receiving cash. As a result, a growing business with a vast inventory may generate income but not have positive cash flows.

5. Profit being confused with cash flow

   Profits are calculated by subtracting costs from the revenue earned. Cash is the amount of money a company has available in your bank account to pay bills. Accounts receivables show as net gains on the income statement and are often confused with profits. But, profitable businesses can go bankrupt simply because they have too much money in their accounts receivable and not enough in the bank since their invoices aren’t paid on time. Similarly, money spent on buying inventory doesn’t appear on the profit and loss statement until it is sold. Firms often end up with money locked up in goods that either sit on the shelf for too long or are never sold.

6. Limited cash management expertise

   Limited knowledge in cash management leads to an inefficient plan of paying off debts and acquiring inventory. A business’s rapid expansion may result in cash flow problems due to over-purchasing inventory but not being compensated for it.

7. Manual reconciliation of bank account statements

   Entry errors might occur when doing manual bank reconciliation. A significant amount of time is spent consolidating, inputting, and confirming bank data. This time could be better spent on strategic actions by treasurers. The two most significant obstacles in the reconciliation process are payment processing delays and a lack of information provided with payments.

8. Poor investment decisions

   Poor cash management means losing sight of the cash assets. As a result, it may be more challenging to spot business trends and issues. Making sound business decisions becomes much more difficult due to this. E.g., Companies may invest money in projects that do not offer the expected return on investment. In this case, the assets represent a net drain on the cash flow statement and the company’s cash balance.

A cashflow management system not only helps manage the cash flowing in and out of your business but also saves it from repercussions such as:

• Fraudulent transactions
• Poor business decisions
• Errors from the high human intervention

There are plenty of vendors providing cashflow management solutions, but before investing in any of them, it is crucial to weigh in on the success factors a particular solution offers, which makes a cashflow management tool best-in-class.

Why should you adopt cash flow management software?

A cash management system is critical to the success of any firm. Cash management software provides real-time data on available resources, allowing you to forecast your working capital requirements and run your business more efficiently. Cash management software is used to monitor and oversee revenue, expenses, and asset and helps an organization to:

• Keep an organization’s day-to-day operations running smoothly
• Maximize profits of the organization
• Actively protect financial data against fraud and theft.

The demand for automated cloud-based solutions is growing, and the market is brimming with many possibilities for processing corporate cash management on a global scale.

To maximize the value and cost-efficiency of the cash flow management tools, cashflow management software should cover the following factors:

1. Automate & track intercompany balances and cash pooling
   A cash management software should automatically track intercompany activities, balances, and interest across all mirrored and notional bank accounts. This helps gain better cash position visibility and improve net cash flow. Additionally, the software must have:
   • A comprehensive view of pooling arrangements
   • Flexible dashboard reporting
   • Various download formats
2. Automate bank statement item matching from the prior day’s records

   Using predefined and treasurer-defined rules, the solution should automatically reconcile transactions. Additionally, it could be used to check or fix any discrepancies manually. Cash managers can concentrate on higher-value tasks since automated bank statement processing and reconciliation helps them:

   • Save time
   • Reduces errors
   • Eliminates manual work
3. Combat risk and compliance concerns

   By identifying errors or fraud in transactions or payments and reducing various treasury risks, cash flow management systems should assist companies in addressing risk and compliance challenges posed by frequent regulation changes.

4. Access to bank accounts in real-time with ideal cash balance calculation

   Businesses that do not have enough cash on hand may face severe cash crunches. Ideally, cash flow management tools should help maintain an optimal cash position to fulfill their daily obligations by tracking cash balances across bank accounts, companies, pools, and currencies.

5. Dashboards and reporting

   A proper cashflow management software should support open-banking APIs to get immediate access to a wide range of cash reporting capabilities by combining and standardizing transaction data from several banks into a single, accessible, real-time dashboard. Moreover, it should analyze cash in motion, deposited cash, and the level of capital reserves to ensure that a company is financially healthy.

6. Security and encryption
   Organizations often have multiple bank accounts with currencies spread across various regions and entities. This exposes them to a higher risk of cyber threats and payment fraud. A cash flow management system should centralize and store unlimited amounts of data with proper encryption, data integrity, data-level access management, and high security. This helps to secure years of bank data in a single repository.

The benefits of an effective cash flow management system are:

1. Displays the company’s cash position

   A cash flow management software automates the collection of previous and current-day cash positions for more effective planning and proactive investment/funding selections. Cash flow management software also enables treasurers to get auto-refreshed currency exchange rates to translate cash balances and transactions into the base currency of the treasurer’s choice.
   For instance, a leading PEO company (Professional Employer Company) faced challenges in its cash visibility. They had different payment terms and intervals, and clients came on and off. This led to forecasting difficulty. However, they achieved a holistic view of its cash flow with the HighRadius cash flow management system. They gained the ability to drill down into daily cash positions at cash flow category, entity, region, and bank account level.

2. Helps make better financial decisions

   A cash flow management system enables treasurers to proactively identify shortages and surpluses to plan daily and weekly cash needs. It allows global and local teams to examine transaction information in several currencies for improved collaboration and reporting, which helps them view regional finances and generate reports in local currency. For better reporting and analysis, bank transactions are divided into treasurer-defined operational and non-operational categories such as A/R, A/P, Payroll, and Taxes. Errors are eliminated through auto-consolidation and classification of bank statement data while giving granular insights for improved investment and borrowing reporting and decision-making.

3. Reduces overhead costs

   Cashflow management software aids in better working capital management by helping cover short-term requirements and lowering fees. It helps minimize interest expense or maximize interest income. Removing manual intervention saves time and effort in parsing and categorizing, which helps bring down overhead costs.

4. Provides seamless bank reconciliation

   A cash flow management system loads and processes bank data automatically through API or sFTP in various electronic formats. Faster consolidation of bank data improves efficiency and reduces human errors by presenting it in a standardized, easy-to-read style for all departments. Bank transaction auto-classification based on bank, account, area, and category improves efficiency, visibility, and control.