Optimizing Liquidity With Accurate A/R Forecasting

Liquidity refers to how easily a business converts an asset into cash without affecting the asset’s market price. Businesses usually initiate this conversion to meet their short-term financial obligations or invest in market equities etc., that can generate more cash instantly.

Accounts Receivable is an asset that can be converted into cash in a short duration. A healthy and timely recurring cash flow from Accounts Receivable is also an indicator of how profitable a business is; which is why Treasury professionals aim to accurately predict cash from Accounts Receivable.

However, A/R is the most difficult cash flow to predict due to:

• Inconsistent customer payment behavior: Owing to multiple market dynamics, businesses seldom receive their payments on time from their customers.
• Lack of visibility into the flow of A/R data: Businesses that operate globally have a large customer base. Gaining visibility into the global A/R cash flow is challenging because of the large volume of data scattered across multiple systems.
• Tool-based limitations: The most used cash flow forecasting tool within the treasury department has always been a spreadsheet. The challenge with spreadsheets is that it only allows the treasurer to forecast A/R using static forecast methods such as the ADP (average days to pay) method – which are usually less than 70% accurate.
• Macroeconomic fluctuations: Liquidity means the conversion of an asset into cash without affecting the asset’s market price. When macroeconomic conditions factor in, the value of the sale made on credit (A/R) that is supposed to be received fluctuates due to reasons such as currency fluctuations, global regulations, recessions, etc.

Factors That Affect A/R

Of the aforementioned factors that hamper the accuracy of an A/R cash forecast, Treasurers have limited control over the macro-economic factors & market dynamics.

The other factors such as inconsistent customer behavior, lack of visibility into A/R cash flow data & tool based limitations could be addressed if treasurers enforce the following methodologies into their forecasting process:

2.1 Regular Revision of A/R cash forecasts:

Most cash forecasts are 60-70% accurate, and this limited range of accuracy is attributed to inherent errors within excel and manual data gathering processes

However, regular revision of cash forecasts helps the treasurer change the assumptions regularly, re-look at the A/R data and tweak the forecast models for better forecast accuracy vis-a-vis reduction invariance.

2.2 Gain Visibility into All A/R Cash Flows:

To drive better visibility into A/R cash flows, Treasury teams should:

• Know the business’s markets: The first step to track A/R across regions, entities, and company codes and then drill down on nuances of ‘law of the land’ such as regulations, currencies, etc.
• Knowing the customers: Once the understanding of the market is established, the next step is to know thy customer, their geo-specific business unit, their payment terms, and their credit scores. This helps in understanding which customer is likely to pay on time and which one is most likely to default.
• Integrating the information to the central A/R forecast: The final step is to build and consolidate all the A/R cash forecasts into a central forecast; that could be used to predict global weekly, daily & monthly cash forecasts.

Gain Visibility Into All Cashflows

3.1 Distressed Businesses:

• Forecast daily and accurately to predict available cash within one-week horizons
• Work with your banks for flexible utilization of credit revolver
• Adopt aggressive A/R collections for all customers

3.2 Cash Deficit Businesses:

• Forecast in short term horizons to borrow proactively at LIBOR rates vs overnight sweeps
• Check available balance in credit revolvers and commercial papers
• Adopt aggressive A/R collections for risky customers

3.3 Cash Rich Businesses:

• Reduce variance for long-term forecasts
• Invest surplus cash to achieve interest gains
• Focus on business expansion/M&As/repatriation
• Run scenario analysis to identify potential business opportunities

3.4 Cash Surplus Businesses:

• Understand the benchmark accuracy for your industry
• Support the CFO’s office for quarter-end business decisions
• Invest in technology to track variance and cash positions

The Drivers of Cash Forecasting

Under the hood – how AI automates A/R cash forecasting and generates accurate forecasts

Real-time Revision of Cash Forecasts:

Forecast and reforecast in real-time to get accurate forecasts

Granular Visibility into A/R Cash Flows:

Track A/R at regions, entity, company, customer and invoice levels

Predict Payment Date with Accuracy:

Predict when an invoice is going to be paid by analyzing customer payment patterns

HighRadius is a Fintech enterprise Software-as-a-Service (SaaS) company that leverages Artificial Intelligence-based Autonomous Systems to help companies automate Accounts Receivable and Treasury processes. The HighRadius® Integrated Receivables platform reduces cycle times in your order-to-cash process through automation of receivables and payments processes across credit, electronic billing and payment processing, cash application, deductions, and collections. HighRadius® Treasury Management Applications help teams achieve touchless cash management, accurate cash forecasting and seamless bank reconciliation. Powered by the Rivana™ Artificial Intelligence Engine and Freeda™ Digital Assistant for order-to-cash teams, HighRadius enables teams to leverage machine learning to predict future outcomes and automate routine labor-intensive tasks. The radiusOne™ B2B payment network allows suppliers to digitally connect with buyers, closing the loop from supplier receivable processes to buyer payable processes.

The HighRadiusTM Treasury Management Applications are a suite of the world’s first AI-powered solutions designed to support treasury teams across all industries by automating and enhancing their cash forecasting, cash management and bank reconciliation processes. The HighRadiusTM Treasury Management Applications are unique in the approach that they are powered by an Artificial Intelligence technology created exclusively to redefine the forecasting, bank reconciliation and cash management processes so that treasurers spend lesser manual effort but extract better outcomes such as making more accurate cash forecasts across all cash flow categories, increased forecasting frequency and variance reporting, gaining instant visibility into real-time cash positions across bank accounts at any level and achieving 99%+ straight-through reconciliation of bank statements without human intervention. The solutions are delivered via cloud which enables them to be seamlessly integrated with multiple systems including your ERP, TMS, accounting systems and banks instantly and simultaneously.