This article explores some of the actions business leaders can take to develop an effective & sustained Cash management strategy, a key resiliency & survival lesson from the pandemic crisis with a particular focus on new technology adoption.
by Evelyne Legaux on 18-04-2023
In the current economic environment, Cash management has moved from being an important topic to featuring, more often than not, on the Board room agenda. With Cash driving how liquid a business might be, managing it soundly is vital to build resilience in the face of uncertainty & volatility.
The era of near exclusive focus on the top & bottom lines of the Profit & Loss Statement is definitely behind us, with Balance Sheet performance now being considered top priority.
And rightly so… While good Cash performance provides flexibility & enables a business to grow, invest or transform, a healthy Balance Sheet remains the best shield against liquidity issues & ultimately insolvency.
Controlling Cash however requires the right culture & discipline throughout the business organization.
So, what should businesses do to get a good grip on Cash?
To manage liquidity effectively, businesses must have visibility over Cash inflows & outflows to be able to predict Cash balances therefore financing needs / excess accurately. For this to happen, businesses must understand what the key Cash drivers are for them, and implement a robust & revolving direct Cash Flow forecasting process.
Likewise, with operating Cash Flow the main Cash generator, businesses must optimize their Working Capital through an effective management strategy. Reality has it though that most companies operate with excess Working Capita,l which equates to significant Cash amounts being trapped in their Balance Sheet, that is a cheap source of funding unavailable to the business in its current state.
To operate more efficiently, any business should identify where those pockets of trapped Cash are, by conducting a health-check review of business processes across the entire Cash Conversion Cycle. Equally essential is to build a Cash culture across the organization by raising awareness of how trade T&Cs or business decisions made by each functional silo, do impact on the company’s Cash.
Most importantly, such Working Capital improvement strategy must be sustained as opposed to being just tactical.
The good news is data-driven, AI, ML or RPA based technology is now here to help…
Optimizing Working Capital across the Cash Conversion Cycle can indeed be complex due to the inherent cross-functional nature of the job at stake. In addition, adopting new technology can be a daunting perspective due to the depth of change involved on a human level. To overcome this hurdle, a proven winning strategy for businesses is to start small then grow.
When it comes to Working Capital management, businesses are advised to harvest the low-hanging fruits first, by automating those Finance processes that are typically manual, repetitive or rule-based, in other words inefficient in nature.
So, let’s have a look at some of those Working Capital processes that are natural candidates for automation.
Order to Cash (O2C) leg - Cash Application
Due to the many different payment methods & remittance advice formats in use in the B2B world, applying Cash received from trade customers can be a very cumbersome, error-prone & time-consuming activity.
As such, any delays in fully & accurately matching a Cash receipt against billing items paid by a customer, can have a detrimental impact on the customer’s account accuracy, visibility and potentially their ability to receive further deliveries or place new orders. Worst case scenario, where a receipt is unidentified, the related Cash is also unavailable to the business until full resolution of the case, with Working Capital remaining artificially inflated.
Not to mention the human impact in terms of low value-add, poor productivity & demotivation of related employees, possibly leading to burnout or even attrition…
The business case for intelligent automation of the Cash Application process is therefore crystal clear, especially knowing that most technology solutions available on the market today offer average auto-matching rates in excess of 90% first thing every morning!!
Combined with a touch of Artificial Intelligence & Machine Learning, automating Cash Application can streamline the process & bring a number of benefits to businesses:
. ability to process all bank file formats – such as account statements & lockboxes, and all types of customer remittance advices or third-party settlement files alike. This translates into augmented standardization & simplification of the daily process itself.
. ability for users to create their own auto-matching rules & embedded workflows. This drives augmented accuracy & transparency in the process.
. ability to detect & resolve matching exceptions, which significantly reduces the need for manual human effort.
. built-in data-driven KPIs & reporting capabilities that provide augmented visibility into the performance of the process & access to real-time analytical insights.
. ability to analyse customer payment behaviours thus influencing their Credit scoring & generating follow up action items.
All in all, automating Cash Application boosts the efficiency of the process in a way that benefits the entire Order to Cash value chain, while unlocking strategic human potential and keeping customers, employees & auditors happy!
Procure to Pay (P2P) leg – Vendor Invoices & Payments
On the P2P side of Working Capital management, very similar fundamental trends can be observed with value-creation, enhanced collaboration with suppliers & digital technology adoption topping the business agenda.
Here too has the recent pandemic crisis changed the business risk environment with resilience & regulatory compliance considerations now superseding cost control on the Procurement priority list. Being at the heart of business organizations, Procurement has an increasingly critical role to play in optimizing inflationary pressures, securing supply, mastering ESG requirements & preserving Cash.
By controlling operating expenses & vendor payments, Accounts Payable professionals are the gate-keepers of a company’s Cash outflows. Equally important is the role they play in protecting their organization from rising payment fraud risk.
As a result, the end-to-end P2P process is becoming strategic thus driving the need for automation & digital adoption to sustain the delivery of such value-add to the business. Embracing new technology proves to be a game-changer indeed, in terms of:
. sourcing diversity through purpose-led search for ESG-advanced suppliers,
. protection from fraud risk through automated detection & rejection of duplicate or incomplete invoices, at an early stage in the process,
. process efficiency through automated vendor data validation, fast & accurate digital invoice capture, elimination of paper, automated workflows & e-signature capabilities,
. more insights into pending payments driving better control of Cash outflows & higher precision in Cash Flow forecasting,
. enhanced cross-functional visibility & collaboration throughout the end-to-end P2P process which helps highlight the benefits of processing/resolving invoices faster such as availing of early-pay discount opportunities offered by vendors,
. standardized communications with vendors - by way of a Vendor Portal or otherwise - to help them fix non-compliant invoices & avoid payment delays,
. augmented real-time analytics, KPIs & reporting capabilities to better measure performance & uncover friction points in the process.
. positive human impact as mundane tasks are eliminated from the process, thus enabling people to be more productive, build better relationships with vendors & focus on value-add strategic activities in the best interest of the business.
Overall, beyond process efficiency & better control over Cash outflows, automating Vendor Invoices & Payments enables P2P teams to bring relations with vendors to a level of trust & respect that can only benefit their organization’s sourcing & supply chain strategy.
Businesses that proactively adopt new technology & new ways of thinking, are better equipped to master change & disruption, therefore are more resilient through challenging times.
By bringing enhanced process visibility & real-time analytics, new technology adoption is also a key enabler for organizations to identify & address Working Capital inefficiencies across the Cash Conversion Cycle, and create a Cash-centric culture across functional silos.
Most importantly, by eliminating manual & tedious tasks and freeing up time for more value-add activities, automating O2C & P2P Finance processes brings a major boost to employees morale, along with renewed possibilities for them to shine hidden talents & creativity. Let alone, the fact that remote work relies on process automation & digital solutions to a large extent.
As such, automation technology is a powerful tool at companies’ disposal to help create a progressive & healthy work culture. Fulfilled & valued individuals make happy teams, which can only benefit the business in return.
Never forget that your competitors will keep leveraging new technology to innovate & grab more market share…
Do let us know your thoughts or questions by email on firstname.lastname@example.org or indeed through our Contact page.
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