Formula to Steer Clear of the Debt-Trap: Is Treasury Cloud the Answer?

You obviously don’t have a magic lamp and a genie that would make business debt disappear (that would be quite the fairy tale), but what you can do is solidify your methods and technologies, so you’re better prepared to manage your debt.

We’ve outlined some of the common bottlenecks in debt management and the solutions to solve the equation of managing debts effectively.

1. Lack of bird’s eye view into your cash position
    
   Discovering the fundamental problem:
   As a general rule of thumb, it’s impossible to truly understand your cash position and analyze debt exposure without crystal-clear cash flow visibility.

   Cash visibility remains an ongoing challenge for most SMEs since most of them rely on spreadsheets to log and manage their transactions. For instance, to pull any inquiries for individual accounts or to carry out in-depth analyses of specific cash transactions, teams need to trawl through numerous spreadsheets, which is very laborious.

   Additionally, due to a lack of cash visibility into intercompany account balances, businesses borrow money from external sources at higher interest rates rather than from intercompany accounts.

   Zeroing in on the solution:
   This problem can be solved by automating the process of data mining using Treasury Software. It would not only provide businesses with a high-level overview of the cash position but also the option to drill down to examine the details of account and cash transactions.

   Automated Treasury Software can save significant hours wasted on crunching data and eliminate the chances of errors. Hence, teams would be able to provide reports faster to the CFOs by reducing the turnaround time in record-to-report.

2. Lesser ways to avail loans
    
   Discovering the fundamental problem:
   Compared to bigger companies, it is more difficult for SMEs to develop creditworthiness as they have less access to sources of finance and lesser information on their fixed assets, which are usually required as collateral against loans.

   Moreover, since they are unable to understand their cash position, it makes it difficult for CFOs to make decisions on time to assess loans with lower interest rates. In a situation of bad debt, drawing loans with higher interest rates can cause a ripple effect and trap the firm in a chain of outstanding debts.

   Zeroing in on the solution:
   Treasury Software uses behavior patterns and analytics to drive formal credit and helps indebted companies opt out of the informal lending system.

   These systems enable the advancement of loans by analyzing real-time cash flow data in the absence of credit history. This helps businesses track their cash positions, bank accounts, and revolver balances to procure loans early on when the interest rates are lower instead of going for overdrafts.

3. Difficulty in tracking receivables
    
   Discovering the fundamental problem:
   Due to varying payment behavior and patterns of customers, it can be difficult to reconcile payments and keep track of outstanding debts.

   Moreover, the current era of inflation alongside recession has led to customers becoming indebted, leading to a domino effect of them not being able to pay at all or pay the suppliers late. Delayed payments from your customers drive your DSO up the wall, putting your business in a cash deficit situation.
   As a result, invoices can slip between the cracks, leading to falling behind on collections and lowering the receivables ratio for businesses.

   Zeroing in on the solution:
   In order to be more efficient at keeping track of receivables, treasury teams should use predictive analytics and AI-powered cash forecasting to observe the trends and seasonality in customer payments and forecast the cash inflows in real-time.

   This enables them to get educated projections on outstanding payments more accurately and hence be more efficient at following up with their customers. This, in turn, lowers the complexity in collections, lowers the DSO, and helps companies stay out of bad debts.

4. Lesser scope of testing different scenarios
    
   Discovering the fundamental problem:
   Since spreadsheets only provide businesses with a historical record of scenarios, CFOs habitually craft decisions out of past experiences and best guesses.

   Perpetually, there is nothing wrong in making decisions out of historical performances, but this strategy isn’t fruitful when there is a sudden change in market conditions. Hence, it’s often observed that most SMEs are unable to pivot with market volatility, where they are unable to squeeze out opportunities when the market is booming and reserve cash for the worst-case scenarios.

   Zeroing in on the solution:
   Testing several scenarios using Cash Forecasting Software through time series forecasting can help CFOs in detecting the best-case and worst-case scenarios against the base scenario.

   CFOs can also generate scenario comparison heatmaps to drive insights based on the impact of distinct scenarios on cash flows. Hence, they can optimize their debt/investment decisions by identifying a cash crunch or idle cash in their inventory.

Reinforcing the solutions stated above, it’s a no-brainer that the cornerstone for CFOs to derive key business insights for debt management is to empower their businesses with Treasury Management Software. Let’s dive deeper into the features provided by HighRadius’ Cloud Treasury Management Software.

Many CFOs have experienced the economy losing steam, but not to this extent or speed. Hence, they need to embrace technologies to optimize debt management and ensure business continuity. Let’s look at how a Treasury Cloud can work as a right hand for the CFOs in managing debts.

A Treasury Cloud gathers real-time data automatically by reducing the manual effort spent in data consolidation, hence saving sufficient time to make informed decisions. It helps CFOs gain visibility to understand how much debt they have and if they have the cash cushion to pay off their debts to maintain their creditworthiness or if they have to go for an overdraft from banks. This way, they can manage their daily expenses and also plan for their growth.

The following are some of the features of HighRadius’ Treasury Software that can help CFOs improve debt management:

1. Provides end-to-end visibility into the cash positions
   The Cash Management Software automates data gathering from banks, ERPs, etc., and provides CFOs with global visibility into cash positions across banks, bank accounts, currencies, entities, and regions.

   It automates prior-day and current-day bank statement processing to provide the most recent review of your bank statements. This assists you in determining whether your organization’s financial status is stable, surplus, or deficit, allowing you to set goals based on credit line availability and predetermined targets to make more efficient decisions.

   The Cloud also enables cash sweeping between bank accounts to ensure the correct bank account balances are maintained to minimize overdraft fees and maximize interest earned at each bank account by setting the minimum or maximum balances for a balance transfer.

2. Automates the reconciliation of bank statements
   HighRadius’ Cash Management Software automates bank statement reconciliation with transactions and even helps track the reconciliation status to ensure that all the bank accounts are reconciled prior to reporting.
   Automatic bank reconciliation helps detect fraud and checks for potential delays in paying your debts.

   Furthermore, the software supports manual bank reconciliation for items that are not forecasted, for example, bank transaction fees for wire transfers reduced from the expected receipts.

3. Creates accurate forecasts for all cash flow categories across time horizons
   The Cash Forecasting Software creates weekly, monthly, or yearly cash flow forecasts using user-defined forecast models to build the accuracy of category-wise forecasts. For example, users can use the AI model in place of the heuristic model for complex cash flow categories such as receivables and payables.

   It also provides a configurable forecast dashboard with automated time series/advanced AI predictions to track forecast evolution over time to analyze and highlight trends and seasonality across transactions and payments.

   You can also track the variances between forecast vs. actuals and forecast vs. forecast with the ability to drill down into the variance sources. The variance analysis feature can be customized as per time horizons and invoice levels to predict A/R and A/P accurately.

4. Enriches scenario planning to predict outcomes of each scenario
   Our Cash Forecasting Software creates worst-case and best-case scenarios against the base-case scenarios. It also predicts the most likely outcome based on the different scenarios by generating a scenario comparison heatmap.

   In addition, you can also compare the snapshots of the scenarios to track your forecast vs. actuals, forecast vs. budget, and forecast vs. forecast reports.

   The software simulates what would happen if borrowing costs increased. For example, your current debt fund investments lose value due to rising interest rates since investors want higher-rate funds. With HighRadius Cash Forecasting Software, you will have visibility into these areas and be able to make strategic financial decisions accordingly.

5. Provides financial instruments for debts and investments
   The financial instrument is an additional feature in HighRadius’ Treasury Cloud that creates, manages and tracks debt or investment transactions. It generates and edits deal cash flows and automatically populates settlement instructions using best-fit criteria to ensure the correct bank accounts are debited and credited with funds.

   Moreover, it supports the automatic integration of deal cash flows with cash positions and cash forecasts to ensure forecasts are updated with recent investment and funding activity.

   It also supports the automatic creation of back-to-back transactions for intercompany transactions to lower duplication of effort and ensure correct intercompany transactions and balances are maintained.

Success Story of HNTB with HighRadius’ Treasury Software