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The easy way of managing cash flows

What you’ll learn

  • Importance of managing cash flows for the corporates.
  • Six ways of effectively managing cash flows 
  • Benefits of using cash flow management automation.

What does managing cash flow mean for the corporate world?

Cash flow management is a set of methods and strategies that can help measure, evaluate, and optimize the company’s finances. Cash flow management is critical to:

  • Identify the cash position
  • Reconcile bank transactions
  • Prevent financial shortages and utilize surpluses

Why is cash flow as important as profit?

A company’s profitability and net cash flow are both critical. However, depending on the conditions, one may be more crucial than the other over time. For example, if a company is profitable but has too much cash locked up in inventory or receivables, it may not have enough cash to fund operating needs such as payroll. In this instance, cash flow is more crucial than short-term profitability.

If a company cannot achieve profitability, it can negatively influence cash flow over time. Many firms exist without generating profits over time. When necessary, cash flow can be improved through loans, asset sales, or other methods of getting funds. But cash flow is not the same as profitability.

Can expansion cause cash flow issues?

While it may appear contradictory, the company’s expansion can cause cash flow problems.

For example, during a period of rapid growth, a company may take too many orders without having the funds to fulfill them, necessitating the sale of stocks or taking a loan. That’s why it’s critical to understand cash flow vs. profit.

Profit vs. cash flow: What is the difference?

Profit represents the amount of money left over after all expenses have been met, whereas cash flow represents the net flow of cash into and out of an organization.

Is positive cash flow a sign that a company is profitable?

Positive cash flow does not imply that a company is profitable. Depending on its financial status, a business may be profitable while experiencing negative cash flow.

Example: A company can be profitable while yet have a negative cash flow, limiting its ability to pay bills, develop, and grow. Similarly, a company with positive cash flow and expanding sales can fail to turn a profit, as many startups and scaling businesses do.

What are the easy ways of managing cash flows?

Using these methods as a guide, the treasury team can maximize cash flow and protect their company’s finances:

Ways of managing cash flows

  • Monitor the cash consistently

    A firm must regularly analyze cash flow to prosper in a competitive business environment. To begin with, forecast the capital requirements of the business and then perform some basic cash flow analysis by tracking cash flows. Having the appropriate cash flow management tool to monitor these variables is beneficial.

    The treasury team can use cash flow management software to:

    • Acquire real-time visibility into cash flows
    • Uncover any spending difficulties
    • Stick to the budget
    • Evaluate the business’ performance
  • Identify business risks & prepare in advance

    Running a business has many risks, and significant obstacles should be expected at some point in the future. A company should consider scenarios like:

    • What if a large order comes in unexpectedly?
    • What if a big order is canceled?
    • What if that crucial client goes missing while still owing the business money?

    This type of risk analysis can be incorporated into the cash-flow budgeting process.

    AI cash flow management software aids the treasury in improving scenario analysis to avoid cash shortages by providing foresight to track present and anticipated cash shortages.

  • Multiply the cash in hand

    ‘Multiply the cash in hand’ is a business term that refers to the number of times cash in hand rotates to produce business transactions. A firm should maintain cash liquidity by reinvestment in regular business activities to keep the cash in hand circulating.

  • Prioritize cash flow over profits

    The key to successful business growth is effectively managing cash flow in the business. Despite having forecasted future profit margins, 90% of companies do not have a cash flow plan in place from the start. Profits are pointless without cash. Many seemingly prosperous enterprises have failed because cash outflows are more than cash inflows. Hence, companies should secure their cash flows first and utilize their idle cash to improve their profit.

  • Set an emergency cash reserve fund

    Risks are always there in business, no matter how well you plan. A reserve fund provides the company with the protection it needs to survive economic downturns.

    A good cash flow management tool safeguards liquidity and helps reserve cash. With cash flow management tools, work out how much the company’s average monthly outgoings are and then save around three months’ worth. This covers any cash flow problems long enough for the company to fix the situation.

    Automated cash flow management analyzes cash in motion, deposited cash, and the level of capital reserves to ensure that a company is financially healthy.

  • Invest in automation

    The most effective way of managing cash flow and keeping track of your business’s financial performance is by utilizing automated cash flow management tools.

    Automated cash flow management tools streamline treasury operations by minimizing human tasks. So, financial professionals can concentrate on liquidity and risk management, increasing team efficiency.

HighRadius’ automated cash flow management tool provides the following benefits:

  • Provides users with dashboards to improve cash flow visibility, understand cash position, use the surplus cash for better returns, and control risks before negatively impacting the business.
  • Enables seamless data integration with data sources (TMS, Banks, Spreadsheets, etc.).
  • Captures intercompany transactions, balances, and interest across all mirrored and notional bank accounts.
  • Automatically compares a company’s bank statements to its accounting records.

Practical benefits of using automation for managing cash flow

Automated cash flow management software has lately changed cash management operations.

Some of the benefits of adopting automation for managing cash flow include:

Benefits of adopting automation for managing cash flow

  • Saves time by monitoring cash flow:
    Cash flow automation provides faster deployment and automates data gathering, providing accurate data and freeing up time for the company to focus on important business activities such as planning finances, budgeting, investing, raising capital, risk management, and planning for dividends and ROI.
  • Improves business efficiency:
    There needs to be a balance between cash inflows and outflows. If a business has too much cash inflow, it means that it’s missing out on opportunities to invest the cash for profits. On the contrary, if it doesn’t have an adequate cash inflow, it will have to borrow cash and pay interest or sell off the liquid investments to generate adequate cash. Cash flow management software helps businesses strike the right balance between inflows and outflows, hence improving the efficiency of a business.
  • Eliminates security gaps:
    Cash flow security is ensured with correctly deployed cash flow management automation systems and procedures. Cash flow management systems ensure visibility into cash balances, improves insight to reserve funds, and enable maximum protection for the cash reserves.
  • Helps make informed decisions:
    A staggering 97% of finance leaders indicated they would expect or have already realized smarter decision-making from comprehensive cash flow management software.

    The right technology provides on-demand reporting capabilities to monitor incoming and outgoing cash receipts and payments. It also detects cash positions accurately. This allows for better strategic planning and more informed financial decisions about funding, investments, and procurement.

  • Allows for maximum performance:
    Holistic cash flow management tools enable businesses to deploy cash resources accurately. When resources are efficiently managed, bottom line performance improves.
    The ability to effectively manage the cash flow is critical to the success of any organization. The treasury team will be able to:

    • Handle any deficiencies immediately
    • Improve ROI for future growth
    • Customize and scale the system according to the business’ demands
  • Increases business agility:
    A cash management tool eliminates downtime with advanced monitoring, diagnostics, and self-service models. Features such as predictive maintenance and remote diagnostics reduce the need for IT support. Easy and faster access to data helps businesses identify and prevent possible issues before they happen. Hence a business’ agility is improved in making essential and timely decisions.

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The HighRadius™ Treasury Management Applications consist of AI-powered Cash Forecasting Cloud and Cash Management Cloud designed to support treasury teams from companies of all sizes and industries. Delivered as SaaS, our solutions seamlessly integrate with multiple systems including ERPs, TMS, accounting systems, and banks using sFTP or API. They help treasuries around the world achieve end-to-end automation in their forecasting and cash management processes to deliver accurate and insightful results with lesser manual effort.