Cash Management: Understanding the Challenges & Identifying the Problems

What does cash management look like at a corporate/enterprise level?

Cash is oxygen for a business. It is needed to carry out daily business operations smoothly. To position your treasury as best-in-class, companies need to leverage the best cash management strategies to properly manage receivables, payables, inventory, idle cash, investments, etc.

Why is there a need for effective cash management?

Cash flow management is the process of tracking cash positions. It bolsters an enterprise to stabilize its liquidity, helps in efficient utilization of cash and assets, and maximizes profitability. CFOs, treasurers, and controllers are responsible for cash management, but sometimes the responsibility of treasury management may be outsourced to other third-party solution providers. It is essential to make provisions for unprecedented events that jeopardize your firm’s cash cycle such as bad debts, seasonalities, and economic downturns.

What are some common problems that most companies encounter?

Whether small or large, many companies encounter cash crunches at some point in their business cycle. The most common problems encountered by companies worldwide are:

Problem #1: Sluggish collection in accounts receivable

According to the 2016 survey by Atradius, 93% of businesses experience late payments from customers. So, it’s evident that Accounts Receivable can have a massively detrimental impact on cash flow. It’s always wise to adopt best and proactive practices to recover unpaid amounts. Most companies face a hurdle here because they don’t have good visibility into when late accounts may pay. Without a solution to analyze cash across regions, bank accounts, and entities, it is difficult to understand receivables and related inflows.

Solution:

In order to ensure faster collection of AR, the best practices should be adopted, which include:

• Sending invoices sooner and ensuring that the invoices are clear and provide a full description of the services offered including taxes.
• Simplifying the payment process by offering multiple payment options.
• Sending payment reminders before the due date and following up with late-paying customers.
• Offering discounts for paying early and penalties for late payments.

Problem #2: Idle cash

Many companies are unable to continuously monitor and manage excess funds due to a lack of visibility and accurate cash forecasts.

The idle cash could be used for:

• Buying tools and equipment
• Paying taxes timely and decreasing debt  
• Investing in stock markets at lower costs 
• Helping in the expansion of business

Solution:

Continuously managing cash inflows and outflows is equally important. Identifying the areas and the time where there is a possibility of cash surplus helps you plan ahead of time by collaborating with various teams and avoid reactive decisions that lead to overborrowing, penalties, or non-optimal business investment. 

So why isn’t my current cash management system working?

Even after implementing best practices you still might fail to control your cash efficiently due to the following reasons:

• Investment in the capital that generates low ROIC
• Non-optimal cash conversion, with DIO and DSO greater than DPO
• Manual and error-prone processes and tools
• Multi-currency transactions
• Incorrect cash flow forecasting

But the question arises: How to manage cash properly?

Following are few cash management techniques to tackle the above issues and become a professional at managing cash: 

• Understand specific customer payment behavior and focus resources on DSO optimization. Visibility across your immediate cash balance fortifies your business liquidity.
• Execution of task-oriented actions is time-consuming and eats away time from higher-value tasks or processes. Thus, leaving the tasks such as bank statement processing and classification of bank flows to automation is a smart strategy.
• The use of automated technology with cloud integration helps in managing high volumes of currencies and complex payment processes. A treasury solution translates the transactions into the base currency of your choice, mitigates transaction risks, and streamlines the global AP processes.
• The cash forecast accuracy is completely dependent on the data provided to the system, so it’s important to make sure that there is enough historic data for forecasting and trend analysis, and accurate real-time data for up-to-date reporting and variance analysis.

The future of cash management is bound to see a great transformation with emerging technologies such as AI, APIs, centralized TMS, and advanced analytics and reporting. If companies continue to implement age-old methodologies, they would be stuck at resolving trivial activities that yield less profit. With the assistance of a foolproof automation system, treasury could focus on resolving high-level issues, continuously analyze how they could improve their business operations better, be cost-effective and explore potential growth scenarios.