Which methods to follow to improve cash flow management

18 May, 2022
6 min read
Gerry Daly, AVP Product Strategy - Treasury
Linkedin profile

What you'll learn

  • The reasons for failing at cash management
  • The impact of automation on treasury management
  • Advantages of utilizing corporate cashflow management software
How does a business have a healthy cash flow?
How to manage a company’s cash flow?
The impact of automation in cash management
Print Bookmark

How does a business have a healthy cash flow?

Healthy growth requires timely responses to changing conditions and new opportunities. Healthy managing cash flow is essential for a business to grow and succeed. It enables a company to take risks and seize new opportunities and unexpected difficulties. 

A healthy cash flow isn’t only about earning more than you spend or having a large sum of money. It’s about ensuring that the company can respond quickly and effectively to new opportunities, critical for short and long-term success.

This is possible through effective cash flow management.

What is cash flow management and its functions?

Cash management is the technique of collecting and processing cash flows. Cash management manages business activities, capital holdings, cash flows, and risk mitigation. 

What is the main purpose of cash management?

Cash management is a critical component in establishing and maintaining a company’s financial stability. Because cash is the key asset utilized to pay liabilities, companies must manage it appropriately to maximize revenues. 

According to a survey sponsored by SAP Universal ID, 80% of finance executives believe that modern companies’ growing complexity and volatility have increased the importance of cash management, reporting, and forecasting.

However, many companies are unable to manage cash properly.

What are the problems in cash management?

These are the main challenges in cash management:

  • Redundant system and high bank volume:

As businesses grow and new units open worldwide, system and bank volumes tend to rise. For many of these businesses, localization is a problem, and they demand technology that can meet those needs better than others. This results in a decentralized structure of data transparency and currency availability.

  • Tedious manual and error-prone processes:

Individual task execution might lead to data input errors and limited bandwidth. The treasury department spends most of its time integrating, entering, and confirming data. This results in only a little time left over for crucial tasks.

  • Settlements or transactions in multiple currencies:

Cross-border payments and currency volatility further complicate cash management. Without proper protocols in place, cross-border transactions can be expensive and complex. Reconciliation, currency-related complications, and sub-optimal payment periods are the top three cross-border receivables challenges. As a result, currency rate swings can reduce company profits.

  • Regulatory changes:

Complying can be difficult due to constantly changing laws, regulations, and employment practices. For example, a department in a high-risk country lacks monitoring of cash, counterparty risk, and existing controls. In this case, fraud, carelessness, and lawsuits can occur when the business is not compliant and has no internal controls.

  • Lack of standardization, centralization, and automation:

When there are many banks, ERPs, and payment systems to monitor, cash management operations can be challenging. Non-standardization leads to ineffective risk management, a different technology landscape, and increased business complexity. Decentralization also leads to delayed reporting and ineffective decision-making.

  • Limited forecasting frequency and quality:

Companies often lack centralized cash forecasting tools and primarily create forecasts using spreadsheets. This has an impact on forecasting turnaround time and accuracy. In addition, new industry innovations, such as the acceleration of payment processing with features like rapid and faster payments, put extra strain on cash flow forecasting. Also, inaccurate forecasts lead to poor cash management.

How to manage a company’s cash flow?

A skilled treasurer can help a business keep an eye on the general health of the company’s cash flow and be better prepared to deal with problems when they occur.

Most importantly, this means making the best use of present assets and liabilities by systematically planning, monitoring, and controlling collections, expenditures, and account balances. Moreover, treasurers should gather and maintain the information needed to make the best use of available cash.

The following are the best cash flow management practices:

Top five cash flow management techniques

  • Keep track of cash flows regularly
  • Delay payables and speed up receivables
  • Cut unnecessary expenses
  • Forecast cash flows and report them timely
  • Track intercompany payments and transactions
  • Reconcile bank statements automatically

The impact of automation in cash management

Cashflow management software is becoming increasingly accessible to organizations of all sizes. Cashflow management software offers the following benefits to treasury:

Seven benefits of AI in cash management

Advantages of utilizing cashflow management software: 

  • Dashboard for high cash flow visibility: Provides a quick financial overview by integrating all bank accounts, loans, and even superannuation accounts. A cash management system records inflows and expenditures and makes information easily accessible.
  • Expenses categorization: Categorizes expenses and aids in planning and deciding which spending can be reduced from taxable income when filing taxes.

Executives can simply track processes and policies using cash management software. Furthermore, all payment request data is maintained in a centralized, cloud-based system, making it easy for treasury staff to preserve accurate records and obtain them quickly.

  • Budget tracking and cash positioning: A cash management application assists in keeping track of a weekly, monthly, quarterly, or annual budget. Moreover, a cash forecasting tool can be used to track the deviations of forecasts from the actuals. The budget can be used to see if the company has enough cash to maintain working capital for the time period provided.
  • Effective decision making: A cash flow management report provides enough information about a company’s revenue and expenses. Treasury can use a cash management system to analyze these documents and determine the cash balance in the company account. This cash balance can be determined early on to see if the organization’s financial status is steady, surplus, or deficit.
  • Ease in making payments and reconciling payments: Payment reconciliation is a bookkeeping technique that compares internal financial records to bank statements for maintaining the accounts. A cash management software helps to automatically match data on cash transactions from financial documents with those recorded in expense tracking. This makes it easier to keep track of costs and manage finances.
  • Time and cost savings: This software allows treasurers to focus more on strategic and high-priority activities by integrating real-time bank data and combining it into a single location. It is also cost-effective as it’s completely scalable and flexible to meet the latest requirements of a company. Moreover, there is no IT intervention required.
  • Better intercompany lending: It can be difficult to collect data from multiple departments and keep track of current collection efforts using manual processes. Cash management software automates the collection of intercompany interactions, balance tracking, and interest recording across all reflective and notional bank accounts.

Customer success story with HighRadius cash management system

A $10 million firm faced the following cash management challenges:

  • Manual effort due to inability to integrate with the sources
  • A/R and A/P largely contributed to the variance
  • The spreadsheet-based process lacked scalability
  • No visibility on the number of available funds and where they are.

They were able to obtain the following benefits after implementing the HighRadius cash management solution:

  • Continuous global cash visibility
  • Manage vendor payments
  • Automate repetitive task
  • Better planning of cash flows

Treasury leaders are looking for these advantages to help them overcome their cash management challenges. Schedule a demo to manage cash flow properly to reach your goals.

Most Popular Resources

All Topics
Autonomous Treasury
Cash Management
Talk TO Our Experts

Streamline your treasury operations with HighRadius!

Automate cash forecasting and cash management with our AI-powered Treasury suite and experience enhanced end-to-end cash flow visibility

Talk to our experts
Thank you for signing up! Stay tuned :)