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What is a Working Capital Management Software?

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It goes without saying that you want to do everything possible to ensure the profitability and overall financial health of your business. Generally, businesses that are able to manage their working capital effectively are more nimble and are often able to expand without financing. So finding a way to improve your working capital management is key. The most direct path to that end is to use working capital management software.

Read on to understand more about working capital management software and what a difference it can make to your business. But first, let’s review some basics about cash flow and working capital and point out some of the potential problems that can arise when working capital is poorly managed.

For starters, you should be aware that this versatile digital tool goes by a few other names: cash flow management software, liquidity management software, capital forecasting solution, cash management software and cash flow forecasting automation are just a few.

You may have noticed that some of the product descriptions use the terms cash flow and working capital interchangeably. Although there is a bit of overlap between working capital and cash flow, they are two distinct metrics. Fortunately, a robust software solution that combines AR automation and artificial intelligence (AI) can improve the way you manage both.

Cash flow is the total amount of cash and cash equivalents that are moving in and out of your business during a given accounting period. Cash flow can affect working capital. If revenue decreases to the point of negative cash flow, working capital may have to be used to cover the shortage.

Working capital management refers to the difference between a company’s current assets and its current liabilities over a specific timeframe.Current assets consists of all the payments currently owed to the business, cash on hand, inventory and any other resources that can be easily liquidated. Current liabilities includes all the payments a business owes, loans, wages, taxes and other expenses.

Working capital = current assets - current liabilities

Managing working capital effectively is a financial strategy that ensures you can meet your day-to-day operating expenses and at the same time use your financial resources in the most productive way.

Components of Working Capital Management

Working capital management is all about the ratio between short-term assets and short-term liabilities. 

Current assets include your cash on hand and the other assets that can be liquidated into cash within one year of their appearance on your balance sheet, including:

  • Cash in bank accounts and any undeposited checks
  • Marketable securities such as treasury bills and money market funds
  • Short-term investments
  • Accounts receivable (less allowances for high-risk accounts that may not get paid)
  • Notes receivable that mature within one year
  • Income tax refunds
  • Cash advances to employees and insurance claims
  • Inventory
  • Prepaid expenses like premiums for insurance

Current liabilities are all debts that are due within a year of their appearance on your balance sheet, including:

  • Accounts payable
  • Notes payable that are due within one year
  • Employee wages payable
  • Taxes payable
  • Interest due on loans
  • Principal due within one year
  • Deferred revenue, such as payments in advance from customers for goods or services

A lot goes into managing working capital. Using cash forecasts and accurate data, you must make decisions on how much credit to grant customers and how best to collect it, coordinate short-term investments and balance inventory, payables and receivables. 

Then you must decide how to best use cash to fund your operations and meet current obligations such as payroll, payments to suppliers, interest payments and taxes. At the same time you need to figure out how much excess cash to withhold for the unexpected but not keep back too much. Other considerations include how to grow the business without taking on too much debt. However, if you do need to borrow, showing that you have positive working capital makes it much easier to qualify for loans or get more favorable interest rates.

For finance teams, managing working capital is already a juggling act, but when you throw in fluctuations in revenue due to the seasonal nature of a business, it’s even more important to not drop the ball. For example, businesses that generate more than half of their revenue in one quarter still need to make rent and payroll the rest of the year. A proper working capital management software ensures there will be funds to cover the slower months.

Problems from Poor Working Capital Management

When there’s a lack of sufficient working capital, small to mid-market companies can find themselves dealing with these problematic issues:

Limited cash flow

A wide range of costs needs to be covered. There’s rent, payroll, accounts payable and other expenses. Even if you don’t have many monthly expenses, costs do add up. And unexpected expenses can often cause businesses to find themselves short on funds. This is why it’s crucial that you manage and forecast working capital effectively.

Poor financial decisions

Inaccurate forecasting can lead to your making misguided decisions when it comes to investing and borrowing. For example, if your forecast predicts you’ll have less cash flow than you actually do, you could find yourself with too much idle cash–cash that could have been working for you through investments or paying in advance to receive discounts. That’s a mistake no one wants to make. 

Get A Step Ahead with Working Capital Management Software

The proper management of working capital is too important for the financial health and growth of your business to miss taking the necessary steps to improve it. With positive working capital you have the means to meet your short-term obligations as well as invest in your future. Working capital management software impacts your financial operations by:

1. Automating manual processes

Manual processes are prone to error and highly inefficient. Automating your AR and AP workflows saves time, wasted effort and costs. With working capital management software, data is seamlessly gathered from any number of sources–spreadsheets, ERP and accounting systems, bank accounts, etc.--to give you real-time totals whenever you need them. This makes cash forecasting more accurate and streamlines the management of working capital.

2. Accelerating collections

Get paid faster with automated invoicing and providing your customers with more payment options. When you don’t have to wait for a finance team member to gather data and manually create an invoice before stuffing it in an envelope and mailing it and then wait a few more days for your customer to open it, you’re on track for speedier payments. And when customers are able to choose from several payment options and make them through a self-serve portal, they are more likely to pay on time–or even early–especially if you offer early payment discounts. AI-enabled working capital management software is able to identify those customers who should be rewarded as well as those who are high risk. 

3. Increasing accuracy of forecasts

Forecasts will never hit the bullseye perfectly, but when the data used is based on real-time cash positions rather than numbers that were manually retrieved days earlier for analysis, they are significantly more accurate. And therefore far more useful. Without working capital management software, your finance team puts in a lot of effort to produce reports and forecasts that aren’t up-to-date.

4. Leveraging your team’s skills

Relieved from the tedious and time-consuming tasks associated with accounts receivable and accounts payable processes, your finance team can finally use their knowledge and skills to bring more value to your business. They will be able to work on special projects, work with customers and contribute to the company’s growth in a more meaningful and fruitful way.

5. Enhancing the customer experience

Working capital management software improves relationships with your customers in several ways. First, error-free invoices build trust and make the approval process easy. No one likes to have to pick up the phone or send an email because of a discrepancy on an invoice. Second, your customers will appreciate the flexibility of having multiple payment options available to them. Finally, most solutions will offer a customer self-serve portal. This added convenience is becoming a feature that customers are beginning to expect from the businesses they work with.

Find Out How Payference Works For Your Benefit

Payference is a working capital management software platform created especially for small to mid-market size businesses. Payference helps by:

  • Leveraging AI technology to make more accurate predictions
  • Improving visibility into cash inflows and outflows
  • Reducing errors by seamlessly integrating with ERP/accounting systems, banks and payment channels
  • Identifying high-risk accounts
  • Prioritizing payables for better cash flow
  • Reconciling payments and accounts automatically
  • Tracking cash flows across different companies, departments, projects, currencies, systems and banks
  • Allowing you to view and manage all your data in one place
  • And much more

Are you interested in learning more about managing your working capital? Our team is made up of friendly people who also happen to be finance whiz kids. They would love to show you how our platform works. Reach out today for a personalized demo!