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Cash Management as a Competitive Advantage


One of the first lessons learned by business students is that cash is king. This is explicitly taught in classrooms and plays out when companies cease operations because they are unable to pay their bills or creditors. From startups to mature businesses, cash flow is critical to success. That is why businesses that optimize their cash cycle enable better business performance and gain a competitive advantage. Companies that do this well consider cash management a core competency.

Cash flow management is not easy. Do you know the total value of your accounts payable (AP) due in the next 30 days? What about credit and past due collections from your customers? Businesses can go bankrupt, even with strong sales, if payment is never collected, so following up and creating data visibility is critical to long term success. Cash management is often hampered by inefficient or overly complex processes. For example, it’s very difficult to forecast payables if invoices aren’t entered into your ERP system timely.

With strong processes and reporting systems, short term cash management techniques can be put in place. If you have a high degree of confidence in payables due in the next 30 days, you can make effective funding decisions to meet obligations to your third-party partners. However, this is still dependent on strong governance and routine for processing invoices and sales.

Building on that routine, accounting and treasury functions can partner with the business to develop a longer-term cash forecast model that ties to the budgeting process. As the forecasting horizon expands, the confidence in your process and data will enable business decisions of whether to use cash to repay debt, optimize tax planning, or improve critical metrics. These capabilities can help you proactively manage the company’s working capital and enhance its ability to grow and increase value.

It may seem easy to begin tracking and monitoring your cash flow, but there are several challenges a business faces when implementing this change. First, access to data can be difficult. Pulling the right information consistently from systems of record can be challenging, especially for companies that operate multiple business units across more than one location or with multiple operating systems. Second the internal business processes must be set up to ensure data integrity and timeliness. Heavy reliance on manual processing leaves room for errors and delays, which in turn reduces the ability to develop accurate key performance indicators (KPI) and meaningful forecasts.  

For longer term forecasts, integration with the business unit forecast is critical for success. Fluctuations in sales forecast can greatly swing credit and cash inflow assumptions. On the expenditure side, newly negotiated contracts or undocumented contract pass-throughs can challenge AP visibility.

This all sounds logical and beneficial, so what steps can be taken to optimize your cash flow? First, clearly identify your goals and communicate them to your business: are you focusing on paying down debt or saving cash for the next investment? Do employees know whether you’re in a growth phase where investment may be higher than revenue?

Next, you need to understand which levers will create the biggest impact. Documenting current relevant processes using techniques such as process mapping will help you identify KPI’s, where manual intervention or other issues are impacting the timeliness and accuracy of data, and where there is opportunity to improve.

Process mapping can also help you identify areas that can be automated, decreasing the need to grow headcount and increasing process control and compliance. Data and KPI review may uncover opportunities to negotiate terms with suppliers, use a credit card for some types of expenditures and help benchmark prices and terms.

Finally, for cash optimization to become a core competency, change management is necessary to help institutionalize the new ways of working. Using the right channels to clearly communicate your “why” can alleviate confusion as new processes and policies are introduced. Transparency with your customers and suppliers is also key. Any policy or process changes should be communicated in a professional manner. Reinforcing the change through shared targets or metrics will also bring business users and your accounts payable and accounts receivable teams closer together.

Formalizing your approach to cash flow will unlock liquidity trapped on your balance sheet and enable growth. Contact us today to learn more about best practices so you can be ready when the next investment opportunity arises.

This article is the first in a series that will address best practices for cash flow optimization. Stay tuned for the next article in this series that will cover how to optimize accounts receivables.


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