How to make cash flow your tool for success

By Adrian Floate MICM*

Inflation, rising interest rates and geopolitical uncertainty remain key threats to businesses as recent global events, such as the collapse of Silicon Valley Bank and the emergency buyout of Credit Suisse by UBS, indicate that decades of relaxed monetary policy and poor risk management have left some companies over-exposed and over-leveraged.

These recent events are a signal for company executives, finance teams and credit managers to make strong cash flow a priority. And while managing a company’s financial risk and boosting cash flow in an unstable global economy can feel like an insurmountable task, it also serves an important lesson. Take steps now to improve the systems and processes that can boost cash flow across your business and you’ll have a competitive edge in a particularly challenging market.

Start with accounts receivable

Accounts receivable is the lifeblood of a business’s cash flow. While revenue may be growing, and there’s a strong sales pipeline, these factors don’t matter if customers aren’t paying their invoices on time. In Australia, for example, 30-day payment terms are standard across many industries. But when an invoice is paid late, companies often wait 50 to 55 days to get paid, resulting in a slow credit-to-cash conversion cycle. To speed up this cycle, businesses should start by identifying and addressing weaknesses in their accounts receivable management process.

Typical weaknesses in legacy accounts receivable management systems and processes include: l Data entry errors l Disjointed manual systems l Slow or no follow-up of overdue invoices l Limited payment options for customers l Sending invoices in paper form or as a PDF via email l Inefficient reconciliation and reporting processes l Inefficient dispute resolution

Digital accounts receivable systems address these weaknesses by automating invoice processing, claims and disputes, and online payment acceptance while enabling realtime cash flow forecasting. This helps businesses speed up their credit-to-cash conversion cycle and improve their cash flow. Decreasing the payment cycle, even by a day, can compound into unlocking significant cash flow. For example, a business turning over $500 million can unlock $1.5 million of capital a year for every day it removes from its payment cycles

Get on top of your credit policies

Having a prudent approach to credit management ensures companies don’t have too many high-risk accounts with growing balances and helps them prepare for economic uncertainty. In fact, 65 per cent of Australian credit managers said they were tightening collections in 2022, compared to 53 per cent in 2021.

Other things credit managers should do to strengthen their credit policies include monitoring high-risk accounts, reviewing risk across their businesses customer base, and completing more regular account reviews. While many companies will have a system in place that will trigger a hold on a customer’s account when their credit is reached or they have defaulted on a payment, the current economic environment provides a prompt to assess whether these credit limits are still appropriate, especially on problem accounts. Taking the time to review and update credit policies now not only improves credit risk management but it has widespread benefits across a company too. If credit policies are refined to eliminate or closely manage problem accounts, the time spent following up late payments and the cash flow bottleneck they create is reduced. As a result, finance professionals enjoy the ability to spend newly available time on more strategic work and projects.

Partner with solution providers that deliver techdriven cash flow solutions

Today, 66 per cent of SMEs want faster access to credit – something banks have limitations in offering due to their legacy credit assessment and operating models. By finding the right integrated payments and finance tech solution provider, businesses can not only improve their end-to-end invoicing and payment processes in one connected platform and get paid faster but improve their overall cash flow management.

Using data and technology to quickly assess the credit worthiness of borrowers, means there is less red tape involved in getting the funding required to cover cash flow gaps and grow, while the agility of these solutions suits the often fastchanging needs of SMEs. For example, invoice finance provides suppliers with upfront payment for their customer invoices. Similarly, supplier and buyer finance connects both parties with a tech-enabled lending platform to provide flexible trade terms, benefiting both buyer and supplier.

Introduce early settlement discounts

Early settlement discounts allow customers to secure a discount if they pay before the due date. With an integrated platform, these discounts can be customer specific, allowing suppliers to reward customer loyalty and strengthen customer retention. Similarly, using a platform that provides customers with access to lending solutions means your business gets paid on time, which helps improve trading relationships and reduces supply chain friction. Keep an eye out for software that allows you to switch from seller to buyer so that you can dynamically manage your accounts payable within the same platform and propose early settlement discount offers to your suppliers too.

The most powerful part of being able to offer early settlement discounts and finance solutions is that an integrated platform provides a facility that is decoupled from cumbersome traditional lending guidelines. No, it’s not a license to lend money to businesses that aren’t suitable. It’s designed to assess a business’s credit suitability based on nuanced criteria applicable to SMEs, not a bank’s rigid credit assessment framework. By using integrated payments and finance solutions, a company’s data and trading history is assessed to secure the right type of finance. As a dynamic solution, the facilities available to the business can scale as it changes, so there is always a suitable facility to draw from.

Modern businesses need flexible cash flow solutions

The perfect storm of inflation, rising interest rates and the growing likelihood of a recession present an opportunity for policymakers, businesses, and their funders to innovate. Nonbank lenders are a key part of this puzzle, providing SMEs with the funding flexibility and solutions they need to exercise better control over their cash flow, better manage their expenses, take the guesswork out of waiting for customer payments, and plan for investments in growth.

For credit managers, working internally to review credit policies and with the company’s broader finance team to improve systems and processes will not only reduce and eliminate inefficient manual tasks but empower them to gain greater control over invoice management and business cash flow.