A New Cash Management Strategy for the New Normal
How well do you know cash management? Let’s review the fundamentals. Which of these statements is incorrect?
A. A sound cash management strategy involves looking at all of the organization’s cash inflows and outflows.
B. Collection processes and the average length of account receivable can have a significant impact on cash management.
C. Cash flow includes a company’s funding and investment activities.
D. Depending on the organization, a CFO, treasurer, business manager, or a cash manager is in charge of cash management.
(The answer is at the bottom of this post.)
Cash management is set to receive increased attention from the board as economic recovery takes hold around the world. Many also believe that cash management will play a central role in driving business growth and profitability in 2021. Nearly 4 out of 5 US CEOs plan to drive growth through operational efficiencies over the next year. Treasurers and cash managers can support that strategy by leveraging faster, better ways to get cash under control.
Key cash management challenges
What do those faster, better approaches to cash management look like? Before we tackle that, let’s explore the roadblocks. Broadly speaking, they are:
- Lack of global cash visibility and control across all bank accounts, resulting in blind spots in the picture of a company’s financial health
- Slow cash positioning due to manual spreadsheet effort, introducing errors into calculations and using incomplete and outdated data as the basis of analysis
Burdened with error-prone data that’s days or even weeks old, companies can’t achieve the growth they want. They risk losing out on investment opportunities, for example, because valuable working capital is either invisible or trapped or across the business. If the company decides to borrow, it may have to accept higher borrowing costs when it shouldn’t have to.
Conventional solutions for cash management
The market already offers several options. Business leaders may choose to:
- Stick with the status quo of spreadsheets and manual processes
- Our take: Proceed with caution, especially when it comes to the fundamentals of financial transformation, such as automation. (An Accenture study revealed that in 2018, CFOs expected 45% of traditional finance tasks to be automated by 2021. In 2020, the number of tasks already automated had surged to 60%.)
- Invest in a point solution to eliminate the current cash blind spots
- Our take: If you’re already considering a solution, ask the vendor how it will scale to your evolving organization and integrate with existing systems. Does it leverage developments like AI and collective insights to help treasurers and cash managers inform board-level decisions?
- Establish a cash war room or spend tower to enable rapid cash improvement
- Our take: Multiple functions to work together here. But these carefully assembled teams often meet at least for one hour a day. How long can the business sustain this? And just because people from treasury, finance, AP, and procurement are in the same room doesn’t mean they can work together. Good collaboration takes the right processes and technology.
Business Spend Management: A new approach to cash management
Today’s treasurers and cash managers have a fourth option to choose from. Until now, Business Spend Management (BSM) has typically been understood as an approach to conduct all business spend activities in one place, with the help of software platforms. But as we demonstrate in our new guide, BSM is so much more.
By creating a real-time, single source of truth for financial data, a BSM approach delivers greater visibility into and control over cash. Access one portal instead of logging into multiple banking accounts. Reconcile payments in minutes, not hours.
BSM also takes a broader view of treasury, allowing companies to use the same platform to manage liquidity, working capital, and risk - all major concerns for anyone working in treasury. Advanced technology, like AI, enhances a range of business-critical activities such as cash forecasting and liquidity planning. Treasury and finance, for example, can screen every single payment for fraud, while procurement applies that same capability to automatically screen every supplier for fraud.
BSM adds value to treasury
Some treasury functions consist of a single cash manager. Others have a team of treasury specialists. No matter how its treasury is set up, nearly every company can adopt a BSM approach to optimize cash and liquidity, improve forecasting, and make smarter financial decisions.
For more insight into BSM’s treasury capabilities and a look at our 4-stage financial maturity model, please refer to our recently released guide to optimizing financial health.
“Money,” Ralph Waldo Emerson once wrote, “costs too much.” We’d add: “If you let it.” Cash can come with a price tag—another bank account generating fees, or working capital tied up in invoices. Or hour-by-hour liquidity planning when the next crisis hits. Cash management underpinned by BSM gives you the opportunity to take a potentially high-cost activity and transform into a high-value process.
* The answer is C. Managing funding and investments is a task that typically lies within treasury’s mandate, which goes beyond cash management.