Companies that managed cash prudently before the pandemic have remained resilient, while less-prepared companies faced existential threats in the face of a liquidity crunch (with some filing for bankruptcy). Gartner reports that over 80% of CFOs have concerns about their operating liquidity and automation is one of the fastest ways to affect the bottom line. (Fig.1)
According to Working Capital Study 21/22 by PwC, 65% of executives named working capital efficiency as the main objective for change management and restructuring activities. The study also points to the increase in Net Working Capital (NWC) by 5%, taking NWC days to a five-year high. (Fig. 2)
Working capital metrics such as days payable outstanding (DPO) and days sales outstanding (DSO) do not provide insights into ways to enhance cash flow, limiting traditional working capital strategies to negotiating supplier or customer payment terms.
There are a wide range of optimization practices that can help CFOs in cash management. Centralization of account receivables, adopting a regular schedule to follow up on collections, negotiating favorable terms and rebates with suppliers, issuing purchase using available volume rebates and trade spend initiatives, and periodically benchmarking vendor contracts against industry standards.
These practices work well when complemented with a range of automation initiatives to enhance cash management. It is imperative for CFOs to understand that any working capital optimization strategy is incomplete without automation.
How Can Automation Help?
1) Identify bottlenecks in Order to Cash (O2C) and Procure to Pay (P2P) process
Finance leaders should record the time it takes to execute each step in the process that adds up to the DSO and DPO metric. Rather than asking the end users for an estimate on the time it takes them to perform the task, the companies should leverage AI-based process mining tools to get visibility into the end-to-end process. This eliminates any bias or assumption from having end users and shows all the discrete pieces of activities involved in the process as well as how they interact with each other.
2) Reducing cash conversion cycle with automation
With a combination of technologies like Robotic Process Automation (RPA), AI, Intelligent Document Processing (IDP), and APIs, companies can eliminate manual processes by more than 70%. This would free up staff for higher value-adding tasks, improve KPIs, enhance cash flow and make processes faster, cheaper, and more accurate.
For example:
Each month, organizations receive multiple invoices from vendors in a variety of formats. InvoiceBotz is a best-in-class automation tool that receives invoices from vendors, reads them using ABBYY or other OCR tools, validates and adds data such as coding, and uploads them to your accounts payable system. (Fig. 3)
Figure 3: Working of InvoiceBotz – Automation of invoice processing
3) Real time cash flow reporting
Forecasting is a critical step in optimizing cash management and, eventually, improving profitability. To enhance the accuracy of these estimates, the organization should automate cash flow reporting rather than relying on error-prone and time-consuming spreadsheets. It is beneficial to actively examine differences in actual results vs. forecast and use this approach to update and improve the accuracy of your forecast assumptions.
For example:
There are automations which generate consolidated management reports consistently and quickly. The output is reliable, consistent, and auditable. This gives back time for analysis, speeds decision-making, and enables new reporting packages for valuable insights not presently available.
4) Go enterprise wide with the initiative
Cash management cannot be done in a vacuum, especially if you operate multiple sites, branches, or retail stores. It’s crucial to keep track of your sources and uses of cash by type and location to get an enterprise-wide view of cash management. Additionally, it means actively involving other departments like sales, purchasing, and operations in the cash management process.
We know there are several ways to solve a business problem, but resilience becomes key in an ever-changing world. And, while market trends change, and customer preferences shift, one thing is immutable: cash remains king. CFOs need to remain committed to releasing cash from inefficient O2C and P2P processes to reduce cost of capital, invest in product innovation, and increase shareholders wealth. Leveraging technology to automate end-to-end processes across the company is the way forward.