Three ways to better manage cash flow

The COVID-19 pandemic, together with ongoing supply chain challenges and economic uncertainty, continues to disrupt how companies do business. One area this disruption is particularly potent is in predicting and managing cash flow.

The past several years have shed light on the challenges facing companies in accurately predicting their cash positions. These include outdated methods of projection and incomplete data sets typically leveraged in making cash flow predictions, such as YOY sales and other historical activity that has been distorted.

To combat these challenges, many finance teams are embracing new forecasting 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, both of which have been major pain points for middle market companies.

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

Create efficiencies through inbound/outbound vendor payment schedules. 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 hand, where transaction volumes are high, companies may consider negotiating 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. Additionally, discounting invoices to encourage more timely payments can help suppliers improve their liquidity position.

Re-imagine the approach to accounts receivable. According to data from PYMNTS' 2020 B2B Payments Innovation Readiness Report, 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. As a result, many companies are reviewing and fine-tuning their accounts receivable processes to protect cash flow.

The exercise begins with analyzing each step of the payments process, including billing, invoicing, receiving, and reconciliation. Often, this analysis offers insight into how companies can use digital solutions to improve their accounts receivable process, including accepting digital payments instead of checks to improve the speed of receipt and deposit of payments. Many businesses are offering discounts to incentivize vendors who move to digital payments.

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. This does not mean the analytics engine will be simple; advances in machine learning and the ability to synthesize historical data are helping to forecast the future more accurately. 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.

According to Bank of America research, most companies currently perform their cash forecasting on a spreadsheet. This is an enormous manual task that produces forecasts that are often outdated by the time the report is complete. 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 even more essential.

• Sara DeCoste is Managing Director, Treasury Sales Manager, Global Corporate & Investment Banking for Bank of America in Chicagoland. Jason Guerra is Senior Vice President, Market Executive for Global Commercial Banking for Bank of America in Chicagoland.