Tool Kit: Cash Flow Recommendations


Three Ways for Portland Companies to Better Manage Cash Flow

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While the pandemic continues to disrupt how companies do business, it’s even more critical for leaders to have access to accurate cash-flow projections. Here in Portland and across the country, the pandemic shed light on major weaknesses in the ways companies predict their cash positions. These include lack of access to a complete view of data, as well as limited analytics for making cash-flow predictions based on historical activity.

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.

As a middle-market banking executive and past chair of Oregon Business and Industry, we’ve seen companies take several different approaches to addressing cash flow, not all of them effective.

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

1. 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.

2. 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.

The exercise begins with analyzing each step of the billing, invoicing, receiving and reconciling-payments process. This approach often provides insights 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 now offering discounts for individuals who use digital payments in order to incentivize customers to make the switch to digital.

3. 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 more accurately forecast the future. 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 all the more essential.

About the authors: Karen Vineyard is a middle market banking executive with Bank of America and the previous past chair of Oregon Business and Industry. Dan George is the director and senior treasury officer at Bank of America.

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