Companies can be classified into two types based on their cash position:
Cash surplus companies/ Net investors
Cash deficit companies/ Net debtors
Based on cash position and financial situation, the drivers influencing the purpose, accuracy, and frequency of cash forecasting vary.
Learn the key differences between the two types of companies in detail:
Cash Surplus Company
Cash Deficit Company
Companies with cash in excess of what is required for running day-to-day operations
Companies suffering from a cash crunch to meet their working capital obligations
Cash surplus companies have their businesses booming
Cash deficit companies are struggling to make their ends meet
Plenty of cash reserves
Utilized most of the revolvers
Cash Forecasting Driver
Business expansions, investments, and M&A
Tightly manage cash, and identify and mitigate risks
Degree of Accuracy and Frequency
Forecast with reasonable accuracy and frequency
Forecast with high accuracy and frequency
5 Steps to Improve Cash Flow
The key steps to make effective decisions during a cash deficit situation are as follows:
Cash deficit companies must find creative ways to extend payables, especially when their A/R is less than A/P.
Ways to extend accounts payable are:
Optimize vendor selection process by negotiating buying terms to longer payment terms or find opportunities for better pricing.
Build great relationships with the suppliers and be consistent with disbursements.
Document the payment terms which can be used in the future, and include all service level agreements.
Approach vendors personally for paying them at a later date, based on rapport.
Track balance in the revolver:
A revolving type of credit is a useful facility for businesses experiencing sharp fluctuations in cash flow and some unexpected large expenses. But, cash deficit firms might overdraw from their credit facility due to irregular tracking of the balance left in the revolver.
The balance can be tracked in the following ways:
Track available amounts on their credit facility regularly.
Available credit refers to the amount left to spend by the borrower. The amount is calculated using the formula: Total credit limit – Borrower’s purchases (along with the interest on them)
Make use of a debt module to track whenever an amount is drawn from the revolver.
Create short-term forecasts to learn in advance about how much amount needs to be borrowed through the revolver. This helps prevent overborrowing.
Cut superfluous expenses:
Review the line items to identify areas to trim costs that deplete savings. Thus a cash deficit organization must explore new ways for cutting costs tactically to liberate from negative cash flow.
This can be done in the following ways:
Record costs by breaking them into fixed costs and variable costs, and prioritize necessities for spending.
Keep a track of tax-write offs.
Let technology take care of menial and repetitive tasks so that employees can focus on high-value tasks.
Outsource bookkeeping processes for swift and error-free auditing.
AI-Powered Solution for Global Cash Visibility and Accurate Cash Forecasting
Create an emergency budget:
Emergency funds help fund basic financial needs during hardships like pandemics, recession, etc.
The necessary steps to plan an emergency budget are:
Review your regular budget, cut unnecessary expenses, save money whenever possible, and take advantage of the busy seasons.
Create long-term forecasts to run scenario analysis to identify peak seasons and risk horizons and their impact on the cash flow.
Negotiating better payment terms with customers:
It is crucial to negotiate early payment terms to collect A/R early from the customers.
This can be done in the following ways:
Offer discounts for early payments.
Keep the invoices handy and follow up with customers personally or through automated reminders as the due date approaches.
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.