How AI Helps CFOs Optimize Working Capital Management

Current working capital challenges faced by companies

The looming recession has led to the following challenges in working capital management:

• Lack of real-time data to assess the efficiency of the working capital plan
• Lack of capacity to handle different scenarios
• Lack of cash visibility across different departments and regions
• Inability to identify the location and amount of excess cash, leading to high cash buffers and reduced returns

To manage working capital properly, CFOs need to focus on liquidity forecasting and planning, releasing trapped working capital. Hence, they require accurate cash flow forecasts to improve their decision-making. However, the forecast is often not accurate or timely enough to make prudent decisions due to challenges such as using manual or non-scalable systems.

What are the effects of inadequate working capital?

An organization with inadequate working capital cannot pay the day-to-day expenses of its operations, and it creates inefficiencies, increases costs, and reduces the profits of the business in the following ways:

• Current liabilities exceed the current assets
• Current ratio (current assets / current liabilities) is less than one
• Large cash outlay or increase in accounts payable 
• The payment period for A/R is too high, and the disbursement period for A/P is too low

Example of having inadequate working capital

Organization X has incurred significant costs in the most recent financial quarter, leaving it with $450,000 in current assets. It has inadequate working capital of $200,000 due to its current liabilities of $650,000. 

It indicates that the organization would suffer if it had to pay off its short-term debts. To pay its debts, the company must try to push through sales or borrow for the short term. This depletes the company’s resources for future growth and investment.

AI-based working capital solution ensures that a company effectively gains greater visibility over its cash and can make confident and timely decisions, focusing more on strategic activities.

What are the benefits of adopting AI working capital management tools for CFOs?

AI and machine learning working capital management tools have progressed to the point where CFOs can now deploy them to provide much-needed automation, efficiency, and accuracy to their forecasts. AI-based working capital management tool provides the following benefits for the CFOs:

• Creations of accurate forecasts across categories, entities, and time horizons to make decisions based on predicted cash flows.
• Automatic retrieval and validation of bank and ERP data to ensure high data quality.
• Creation of a range of base cases and other scenarios in a single repository to stay prepared for different events.
• Easy access to reports such as the ‘Expected Invoices Forecast Report,’ which will provide payment predictions at the invoice and account level.
• Evaluation of forecast accuracy utilizing ‘Forecast vs. Actual’ trends and reduction of variance between forecasts and actuals over time.

Advantages of AI-based cash forecasting for CFOs

In a recent EY survey, more than 58% of CFOs felt they do not have enough time to properly develop and define strategic decisions.

CFOs now need to play a pivotal role in working capital management which generally comprises three key areas: payables, receivables, and inventory. AI-powered solutions can help make each process more efficient and profitable.

AI working capital management tools enable the treasury department to stay on top of changing circumstances and macroeconomic variations that would otherwise go unnoticed. 

Five ways to manage working capital using AI

1. Increase capability to meet short-term liabilities:
   

   CFOs can ensure enough cash is available for upcoming opportunities and unanticipated occurrences by creating a consistently high level of working capital management. Additionally, it helps them meet short-term liabilities and provides CFOs more control over how they manage their operations.

   
   
2. Utilize funds wisely with high cash visibility:
   

   Autonomous treasury solutions allow CFOs to allocate idle funds efficiently. Extra funds might be utilized to expand or restructure the business, buy new products, pursue global markets, or go for mergers and acquisitions. Therefore businesses can achieve a competitive advantage alongside a plan for the future.

   
   

   For instance, a professional employer company had no dedicated cash forecasting process and made decisions based on limited information and intuition. After leveraging HighRadius’ AI-based treasury solution, they could make better decisions on M&A along with the overall increase in efficiency and better resource utilization.

   
   
3. Manage A/R and A/P better with improved forecasting:
   

   Only when areas such as A/P and A/R are running smoothly can a company maintain sufficient working capital. AI-enabled working capital solution improves A/R and A/P forecasts by performing historical analysis to identify the historical trends and predicting customer-specific payment dates by supporting many customer and invoice-level variables.

   
   
4. Get full transparency at the global level through bottom-up forecasting:
   

   Bottom-up forecasting approach results in high global cash flow visibility. This enables corporates to stay ahead of the curve by having easy and continuous access to data in a single repository.

   
   
5. Reduce forecast variance to achieve accurate forecasting:
   

   AI-based cashflow projection system detects deviations which helps understand the forecasts’ accuracy. Additionally, to increase cashflow projection accuracy by up to 95%, the cash forecasting software uses a feedback loop model that examines previous and present results and modifies projections accordingly.