The goal of cash management is to know how much cash you have, forecast more quickly and accurately, and manage cash flow with precision. And while that does sound simple, there are 5 primary challenges that are critical to understanding and overcoming to manage cash effectively and efficiently: Timing, liquidity, efficiency, risk, and compliance.
Read on to learn about how each affects your company’s planning and cash flow.
Timing (Cash vs. Accrual Accounting)
The challenge with cash is that it can be hard to track and manage and needs to be contextualized relative to the many timing differences caused by accrual-based accounting. For instance, a business might generate a lot of revenue as reflected on its income statement, but if it doesn’t collect cash from its customers, it won’t stay in business very long.
Likewise, a business might appear to have a lot of cash on its balance sheet, but if its debts are much greater, it may be insolvent and headed for bankruptcy. So, while accounting for financial transactions in accordance with GAAP results in periodic financial statements, they aren’t always the most complete or even best source of information to manage the operations for the following reasons:
Disadvantages Of Using GAAP Financial Statements For Insights & Decision-Making
- Generated weeks or months in arrears—well after business transactions actually occur
- Become very technical satisfying more of a compliance function that an operating function and as a result
- Hard to fully comprehend for business operators besides CPAs and most CFOs
Advantages of Using Cash Flow Analysis For Insights & Decision-Making
- Cash from the bank is the simple, hard truth; it never lies
- Accounting for transactions from the bank is automated so you can report results almost immediately
- Daily consistency lends itself well to trend analysis and forecasting
- The bank provides cash flow codes and reference data that can be linked to ERP / accounting systems for data enrichment for the best of both worlds
- Visualizing analytics from operating cash flow can be more insightful and easier to understand for people throughout the business with little to no translation required
The world is seeming moving faster each day. While GAAP accounting is becoming more compliance driving, which slows down the reporting process, the percentage of transactions originating digitally is growing massively. Access to data is, now more than ever, becoming critically important to manage cash flow effectively.
A business must have a sufficient amount of cash to pay its obligations as they come due, such as payroll or travel expenses (opex), purchases of inventory or raw materials, purchases of manufacturing equipment (capex), buying furniture for the office, paying dividends to its shareholders, etc. This is referred to as liquidity.
Hence, a business could have a lot of assets, but if those assets are illiquid and not able to be converted into cash timely in order to meet its obligations, then it could cause the business to go into default or ultimately fall into bankruptcy. For example, on payday, a business has to pay its employees in cash, not in inventory or office furniture. It’s critical to have enough cash in the bank to meet your monthly expenses and keep operations moving.
It is important for a business to ensure that it is using cash efficiently in alignment with its strategic goals and short-term objectives. To determine the effectiveness of your cash flow strategy, ask yourself:
- If your business has a surplus of cash on hand, are you putting it towards short-term investments to generate yield or interest income?
- Is your business managing its expenses keeping its costs down so it can optimize profits?
- Is manufacturing equipment that was recently purchased sitting idle or is it in production to generate a return on its investment?
- Does the company have a travel policy, where the reimbursement of employee expenses is reviewed and approved by management to ensure that they are meeting guidelines for meals, airfare, or hotel costs and not being wasteful?
Determining the answers to these questions will provide a better picture of your cash is being utilized to grow the business. If there are any investments not providing an adequate return over time, it’s critical to move that cash into more affective investments.
Businesses need to constantly assess the risks of business decisions that have an effect on cash. The risk associated with achieving interest income (yield) on its investments must be assessed in the context of the need for adequate liquidity to pay its future obligations. Making these decisions can have profound importance to a business’s operational continuity as some decisions can be at odds with others.
For instance, investing in a 1-yr CD may achieve a higher interest rate on idle cash, but it means the business will have less liquidity during that time. In another instance, delaying payments to vendors may increase working capital, but it may also put an administrative burden on the accounting department fielding calls from vendors asking when they will be paid. Having a treasury policy to govern risk can give the business a playbook of how to manage many of the constant decisions around liquidity and efficiency that are all a part of risk management. All of these decisions can affect cash.
A business must comply with laws, government regulations, employment practices, and ethical codes of conduct. It establishes policies, procedures, and internal controls as a way to ensure compliance. Everything a business does to manage cash has to be within the context of staying with compliance guardrails. When internal controls are insufficient to maintain compliance, negative consequences could occur, like fraud, losses, or negligence. These events could trigger lawsuits when businesses fall out of compliance with internal controls that are in place to protect against such things. Ensuring the business stays compliant with the many areas required, promotes continuity of operational health and minimizes the risk of disrupting its underlying cash flows.
Managing cash for any company can be challenging. The world is becoming increasingly digital and data is exponentially increasing. To overcome the many challenges of managing cash, it is becoming critically important to leverage the latest in technology to automate the many, often manual, workflows in finance and treasury.
The era of Open Banking has begun, which enables companies to gain global cash visibility across their multitude of bank accounts. This new era has introduced unprecedented value and the desire for an increased pace of cash management and financial reporting. Upgrading to use best-in-class predictive machine learning techniques for treasury management, accounting, and financial planning & analysis is now possible.
Trovata, the next-gen, automated cash management solution, can help you automate your manual data aggregation and normalization, empowering you with rich insights into your cash flow that could propel your cash management strategy towards further growth.
Download our GoTo (Formerly LogMeIn) case study to learn how Trovata enabled GoTo to Better focus on strategic analysis by reducing cash processing times with automation.