APIs are changing the face of business as we know it. So how does API technology work, and more specifically, how can it work for you as a finance professional?
Understanding API Technology in Fintech
APIs are direct one-to-one communication portals. APIs allow third-party applications to communicate with websites, servers, or financial institutions. At the consumer level, API technology powers popular apps like CashApp, Uber, and Lyft.
API technology makes it possible for businesses to directly connect multiple bank accounts, investment portals, and ERP systems. As financial institutions make their APIs available, developers build secure portals right into their applications. These direct API connections have been the driving force behind financial digital transformation and the development of automated cash management platforms.
API Use in Cash Flow Analysis
Accurate cash position data is key to understanding, evaluating, and planning for a company’s financial health.
Quality cash data is the foundation of strong cash flow analysis. API connections work to streamline the business’ workflows by automating the collection and normalization of transactional data.
The cash flow statement reflects data from multiple categories, including cash flow from
- Operations: accounts receivable, accounts payables, income tax payables
- Investing: the purchase and sale of assets such as property, equipment, investment securities, and more
- Financing: the cash involved in debt, equity, and dividends
Manually creating a cash flow statement can be a complex and time-consuming process. It’s important to gather and reconcile all of the relevant statements, receipts, bills, and other documents, many of which are physically located in different departments. Sometimes this data is available only via legacy technology such as SWIFT MT940 files, which is often slow. Batch downloading numerous documents from multiple banking portals is usually part of the process, but it’s inefficient and liable to human error.
This is where API technology comes in. APIs are specifically designed to allow fast, accurate, and secure communication from one digital platform to another, in spite of different formatting and other hurdles that would typically get in the way. APIs enable fast, detailed, and efficient data transport.
The fact is, APIs also provide superior data due in part to their speed. Accrual-based ERP systems are notoriously slow and complex, compiling data and estimating accrual rates with an imprecision that’s especially risky for companies operating on thin margins, such as startups, manufacturing many others.
With accrual-based ERPs, it’s necessary to correct the time lag between data collection and data analysis, but that is not an easy task. Some companies will underserve future payouts to maximize cash flow, resulting in unnecessary financing or even insolvency when a crisis hits. Other companies may choose to overcompensate, allocating over-generous funds for future payouts. But this approach can harm liquidity and stifle the company’s ability to expand or innovate.
But APIs enable up-to-the-minute pipelines to a company’s needed data, improving accuracy to levels previously considered out of reach. The resulting improvement in cash flow analysis brings enormous benefits not only to accountants and controllers but to C-level executives as well. Every department can benefit from clear, accurate, and timely data. In turn, the entire company is poised for increased productivity and profit.
If APIs connect and transport high-quality, real-time data, what exactly do they connect it to? In our example above, users connected their data (from various B2C financial institutions) to a convenient platform such as CashApp.
While consumers have grown accustomed to instant transactions and analysis, cumbersome legacy systems have dominated business accounting and analysis for decades, often patched with in-house, department-specific software designed to fill in the gaps. Only in recent years (primarily due to European and British emphasis on open banking) institutions and businesses are just beginning to access the same benefits that APIs have extended to consumers for a long time.
API-powered platforms such as Trovata enable the automation of typical cash flow reporting procedures using advanced AI (artificial intelligence) and ML (machine learning) technology.
By leveraging AI and ML technology, the Trovata Platform can:
- Consolidate and normalize cash data, past and current
- Create a single source of truth for transactions across all subsidiaries
- Quickly generate accurate and detailed reports from the business’s trove of data
Improve Your Speed to Decision with Cash Flow Analysis in Trovata
Ready to reduce manual cycles and leverage automation to your business’s cash flow analysis?
Download the “Square Case Study” to learn how Square leveraged a rich data lake across all finance teams, removing the burden of data maintenance and quality assurance from their IT department.