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Oiling The Many Moving Parts Of Cash Flow Management

Effective cash flow management is key to maintaining a viable business during the pandemic. Amid market volatility, organizations are finding it imperative to accelerate their accounts receivables while extending accounts payables and still maintaining positive buyer-supplier relationships.

The problem with this strategy, however, is that when every company is looking get paid more quickly but pay their own invoices later, B2B buyers and vendors quickly find themselves in a position in which their own cash flow goals contradict each other.

In a recent conversation with PYMNTS, Payference Founder and CEO Prashant Kumar said these conflicting B2B payment strategies aren't the only cash flow challenge finance leaders face today. But there are cash management tips and tactics that organizations can deploy in order to move the needle forward towards their cash flow goals, from prioritizing the most lucrative buyer-seller relationships, to finally ditching the Excel spreadsheet.

Many Moving Parts

Managing financial data across a vast array of platforms, including accounts payable, accounts receivable, accounting and ERP systems, creates a challenging environment in which to understand cash positions and forecast cash inflows and outflows. While the pandemic has accelerated digitization of the enterprise, Kumar noted that it is still difficult for CFOs to actually make use of the electronic data they now have at their disposal.

"The biggest barrier to cash flow management is putting together the data in a consumable way for executive teams," he said. "Most of the companies I talk to in the middle market will use one of the big ERPs and invariably pull the data into Excel. That's error-prone, very static, and takes a lot of time."

That inefficient process creates yet another barrier for finance teams: spending hours every week on organizing and analyzing this financial data means that, by the time any insight is presented to executive teams, it's likely already stale. Achieving real-time data analytics is a lofty goal for organizations without the proper tools.

The third major hurdle to efficient and effective cash flow management, added Kumar, is being able to take advantage of the technologies that are already at organizations' disposal to optimize financial forecasts. Open banking and APIs support real-time data aggregation, and machine learning has now advanced to be able to provide more actionable cash flow predictions, yet cash flow management tips and strategies continue to lag, he said.

Cash In, Cash Out

Accounts receivable and accounts payable are two key functions of the enterprise with significant impact on cash flow. As the points at which money flows in and out of an organization, AR and AP optimization are critical to obtaining an accurate and holistic view of cash positions. Yet, as Kumar noted, AR and AP goals can often conflict with business partners.

There are cash management tips to address this challenge. Developing strong relationships with suppliers is key to establishing favorable payment terms on the AP side, for example, while the AR team can deploy a similar strategy to ensure payments coming in are predictable and steady. Once payment terms are determined, organizations can also be strategic about the business partners they prioritize: ensuring that the orders of customers with shorter net terms are taken care of first can steer a firm toward healthier cash flows. Even optimizing the sales team's operations can set an organization up for favorable relationships with strategic clients, said Kumar.

AR digitization is also a critical component of not only making payment inflows more efficient but obtaining valuable data around money coming in that can be used for forecasting purposes. Understanding not only that an invoice is outstanding, but why a customer hasn't yet paid is key to ensuring funds eventually arrive in company coffers.

Optimizing Payments

The payment function itself is yet another way organizations can drive stronger, more predictable cash flows. Just as payment term negotiations can enable strategic timing of cash inflows and outflows, guiding customers to certain payment methods is another valuable tool.

Corporate cards are particularly effective, according to Kumar, even if a portion of an invoice is migrated to card payment.

"You can not only get cash back, but you can also potentially extend payment terms by paying by card," he said, noting that with the right systems in place, transaction data can be analyzed to migrate certain customers on the AR side, or move certain invoice payments on the AP side, to particular payment tools based on timing, capital flow, rebate opportunities and other factors.

When practicing effective cash flow management, it's important to deploy the right technologies that can extract this kind of data to not only understand cash positions but look ahead into the future, with everything from customer outreach to payment method impacting cash flow forecasts. As Kumar noted, the ways that businesses manage their cash flows will continue to evolve in a real-time environment, in which faster payments present the opportunity for finance chiefs to secure more data from their transactions. At the same time, real-time payments may also create new hurdles for CFOs as liquidity moves more quickly, adding even greater pressure for real-time cash flow insights.

"I do see challenges there," said Kumar, "as well as opportunities."