Lessons learned from Covid-19
In 2020, many businesses’ resilience was tested, and many attempted to protect their capital using their existing credit facilities. The pandemic emphasized the need to understand market functioning to support their business. Amid the chaos, treasury learned the following valuable lessons from the pandemic:
- Communication – More communication is always better.
- Engagement – Managers have been compelled to think outside the box to engage their employees.
- Networking – Treasury would do well to re-embrace the concept of an online community for treasury and finance professionals.
- Technology – Companies need to invest in technology to thrive in any business environment.
- Innovation – Companies and leaders had to experiment and innovate to keep themselves, their teams, and business partners agile.
- Realignment – Aligning on expectations should be done more than once a year. Doing this monthly at least is a good practice to continue to maintain
Cash forecasting is king
Treasurers anticipated more accuracy at regular intervals and more frequent changes based on current cash flow data in the pandemic. With working capital being a significant issue, the treasury department must forecast accurately and frequently during a crisis to manage liquidity effectively.
Drivers of cash forecast accuracy
- Approach: Build a bottom-up forecast.
- Data gathering: Pull the most real-time and accurate data straight from the source.
- Modeling: Ensure to use the suitable models for the right cash flow categories.
- Variance analysis: Calculate variances based on the difference seen between forecast and the actuals frequently.
How to forecast Accounts Receivable and Accounts Payable accurately
Forecasting Accounts Receivable
According to the survey, forecasting Accounts Receivable was found to be the most difficult. The factors that cause unpredictability in A/R are:
- Seasonal trends
- Business cycles
- Payment behavior
- Credit score
- Disputes
- Discounts or rebates
How to forecast Accounts Receivable?
1. Process
- Credit
- Sales order and fulfillment
- Invoicing
- Cash applications
- Collections
- Deductions
2. People
- Assign, revise and manage credit limits by:
- Credit analyst, Credit manager, Risk header, Treasurer, CFO.
- Credit reporting and metrics by:
- Credit specialist, Credit manager, A/R manager
- Approvers:
- Director, Procurement, A/P manager, Controller, Treasury manager
3. Technology
- Cash application: Aggregate remittances from multiple sources in multiple formats.
- Credit: Evaluate creditworthiness through credit scoring format.
- Collections: Shift to a proactive collection approach with a prioritized worklist.
- Deductions: Enable faster dispute resolution to save the analyst’s time.
Forecasting Accounts Payable
Forecasting Accounts Payable is also complex because of the following factors:
- Payment terms
- Payment methods
- Time of purchase/Delivery of goods
- A/P portals
- Discounts/Rebates
How to forecast Accounts Payable?
1. Process
- Capture, code, and send: Capture and code invoices and send them for approvals
- Verify and approve: Approve or reject assigned invoices.
- Authorize payments: Final A/P approval is required for submitting invoices for payment.
- Send to the financial system: Approved invoices are created and paid in the financial system.
- Access audit-ready details: Easy access to complete approval history.
2. People
- Procurement
- Identify and vet suppliers.
- Negotiate the terms of the contract and payment terms.
- Accounts payable
- Supplier onboarding, supplier information, and relationship management need to be taken care of.
- Approvers
- PO approvers, supplier approvers, payment approvers.
- Director, Procurement, A/P manager, Controller, and Treasury manager.
3. Technology
- Collaboration: Communicate simply around the invoices.
- Online accessibility: Allows A/P, approvers, and mentor providers to connect from any location.
- Visibility tools: They are used to obtain a detailed view of the whole P2P process.
- Intelligence: To have a better understanding of suppliers and the accounting process.
- Diligence: Internal controls should be enforced, fraud risk should be mitigated proactively, and audit trails should be used to ensure compliance.
How can forecasting accuracy be improved
- Understand the purpose of the forecast.
- Map every process in detail.
- Understand the drivers of cash forecast accuracy.
- Understand the data needed vs. the data available.
- Understand the forecast accuracy inherent barriers.
- Invest in the right size technology and the right solution provider.
- Increase visibility into processes, supplier, and customer activities.
- Establish accountability.
- Harmonize the cash forecasting procedures and systems.
- Establish a mindset of continuous improvement.
Watch the webinar to understand how companies are using Artificial Intelligence to improve accuracy in forecasting Accounts Payable and forecasting Accounts Receivable and generate more possibilities for improvement in their treasury processes, including greater ROI.
