Three Ways to Better Manage Cash Flow

BY DEIRDRE MCALEER

IN A TIME of constant economic uncertainty, it’s more critical than ever that business leaders have access to accurate cash flow projections.

However, many Delaware companies are still experiencing major weaknesses in the way they predict their cash positions. According to Bank of America research, most companies currently perform their cash forecasting on a spreadsheet, an enormous manual task that often produces forecasts that are outdated by the time the report is finished.

To combat these challenges, many finance teams are embracing new solutions that use machine learning to harness data and improve confidence. Empowered by treasury digitization, companies can better predict future cash needs without significant manual efforts or costly technology investments.

Here are three ways companies can immediately improve cash flow processes and help grow their business:

Use incoming and outgoing payments with vendors to create efficiencies. By applying a strategic approach to payments, companies can unlock hidden cash flow from day-to-day operations. The process involves segmenting suppliers based on transaction value and the strategic value of the supplier. Suppliers who rank low in both categories are good candidates for payments through card-based products. This can improve processing efficiency, extend payment terms through a regular billing cycle, and potentially lead to a rebate based on spend volume.

On the other end of the spectrum, where transaction volumes are high, companies could seek to negotiate liquidity and financing options. For example, extending payment terms from 30 to 60 days will allow buyers to generate substantial cash flow from the extensions, while discounting invoices for quicker payment can help suppliers improve their cash/flow/ liquidity position.

Improve the overall accounts receivable approach. According to data from PYMNTS’ B2B Payments Innovation Readiness Report, the average days sales outstanding—meaning the average number of days it takes to collect payment after a sale has closed—increased from 39.7 to 42.6 days within the first year of the pandemic. Many companies are reviewing and fine-tuning their accounts receivable processes to protect cash flow.

Invest in digital tools to forecast cash flow. Digital solutions can significantly improve cash flow projections, and the investments don’t have to be expensive. Companies should focus on “needed” versus “nice to have” capabilities when looking for a forecasting solution. The needs should include built-in analytics tools capable of scenario analysis with various growth rates, trailing averages, and other assumptions.

Additionally, an effective digital tool should be simple to use without requiring extensive training to operate or implement. Your banking partner may be able to help with some of the heavy lifting by providing options for machine learning solutions to free up treasury staff for other activities.

Adopting digital tools can help accelerate the process of cash flow projections while increasing the accuracy of future predictions. As the economy enters an environment of rising interest rates, the ability to manage working capital will become even more critical, making the investment in cash flow projection tools all the more essential.

Deirdre McAleer is market executive of business banking at Bank of America.