The specialist software and systems that can be used to improve cash flow management couldn’t have become more affordable and accessible at a more convenient time, as suppliers of spend control, collaborative payments, and treasury management systems explain to Lesley Meall, FSN contributing Editor.
A bird in the hand is worth two in the bush. Don’t count your chickens before they are hatched. Fine words butter no parsnips. It never rains but it pours. Knowledge is power. Money talks. Riches have wings. Waste not, want not. If you want to wax lyrical on the current liquidity crisis (and who doesn’t) there is no shortage of appropriate proverbs. But actions speak louder than words, so organisations are mustering their troops, putting their best feet forward, and grabbing the bull by the horns, in their attempts to better manage their cash flow.
It isn’t easy. Lack of systems integration, inaccurate sales targets and projections, poor inter-departmental communication, weak credit control and inefficient collections policies are just some of the barriers – but this is one of those ‘Is the glass half full or half empty?’ scenarios. Every area of weakness is an opportunity, and the lack of liquidity in the banking system means that many organisations are prepared to focus their efforts on challenges that would previously have been deemed too costly, too complex, too time-consuming – or all three.
“The most effective way of reducing cash flow pressures is to spend less,” observes Neil Robertson, chief executive of Compleat Software, an expert in spend control software, who suggests that companies can reduce their overall spend by between 1 per cent and 4 per cent, by consolidating their corporate spend to nominated suppliers and negotiating better prices and better payment terms. This is easier said than done, however, in an environment where budgeting processes are decentralised and too dependent on manual and spreadsheet-based processes.
“Most organisations still manage cash flow through the extrapolation of corporate budgets, substituting ‘actuals’ from the management accounts on a month-by-month basis and projecting cash requirements using the future budgets,’ suggests Robertson. But when this is combined with decentralised budgeting, manual and spreadsheet-based processes, and a weakening market, it can become increasingly ineffective. “The result is a cash flow forecasting methodology that is always out of date, always incomplete and prone to underestimating cash requirements,” he says.
Commitment accounting and centralised budgeting have always been an option, technically, but cost, complexity, and long system implementation times have been issues for many. “This has changed,” says Robertson. “There are a growing number of comprehensive ‘purchase to pay’, ‘automated order processing’ or ‘electronic procurement’ software solutions available that are easy to use and very fast to implement,” he asserts, and they can offer a quantifiable return on investment that can be achieved “within a few months”, as well as bringing clear business benefits.
According to Chip Martin, vice president of enterprise payments for Bottomline Technologies, the collaborative payments and document management specialist, many organisations have already focused on accounts payable, making accounts receivable “more of a green field site”. In the current climate, you could be forgiven for wondering why any organisation would want to speed up its invoice processing: after all, who wants to pay their bills and wave good bye to their cash any sooner than necessary? Well, quite a few organisations, actually – and with good reason.
Improving spend management
“Many global organisations now realise that invoice processing is very paper-centric and there is lots of scope for streamlining and improving it,” says Martin, which can benefit cash flow management directly and indirectly. “Having rapid access to electronic information on payments means that it can be ‘scrubbed’ much better, and more time can be devoted to spend analysis,” he explains, adding: “This gives me a better understanding of what my financial obligations are, and it’s good from the point of view of spend management.”
The time taken to process paper invoices may seem like a boon if you are trying to hang on to your cash for as long as possible, but doing this can be a counterproductive. “You only get a tertiary look at invoices if they are on paper,” says Martin, “and with electronic records it’s easier to handle invoice validation, spotting errors, identifying duplicates, and checking that you are actually getting your contractually negotiated discounts.” So Bottomline is seeing growing numbers of organisations “encouraging” their suppliers to invoice electronically.
“There is a big push for power players to tell suppliers ‘If you want us to maintain our current payment terms or get paid on time, then you will need to invoice online,”’ reports Martin. “Some payers are being asked to present purchase orders online, some are being asked to visit clients websites and enter the information manually, and some are being given direct electronic access, to systems,” he explains, as organisations do their utmost to automate as much of the invoice processing and payment cycle as possible.
“This can be a mutually beneficial approach,” suggests John Dineley, sales manager at COA Solutions, and the provider of accounting and business intelligence software is seeing its clients increasingly using its web-based workflow systems to work in partnership with their suppliers. “It makes it much easier for suppliers to check on invoice progression and get paid more quickly,” he says, “and knowing exactly what is going to happen and when helps you to make better predictions and plan ahead more effectively.”
Being able to process invoices rapidly and pay electronically can also be used to negotiate improved discounts. “If you can pay in 15 days instead of 30 days, you may be able to get a 10 per cent or 20 per cent reduction,” suggests Martin, and now is a good time to chance your hand. “Some payers are surprised to see their suppliers opt in on this,” he says, but it isn’t hard to understand why ‘quick pay discounting’ or ‘dynamic discounting’ (as it is variously called) is becoming more popular, as Martin observes: “The alternative may be having to go back to the bank and ask for an overdraft or a loan.”
The focus on cash flow management is now so intense that some organisations are taking even more innovative and pro-active approaches. “Payments via corporate credit card are also increasing,” he says, because as well as providing enhanced levels of control and visibility into discretionary spend, this can enhance cash management – and not in the most obvious way. “If you pay by credit card you can enjoy the benefits of faster payments, such as negotiated discounts,” explains Martin, “and the card processor may in turn share the interchange fees back with the payer.”
Global cash management
Treasurers are also looking at their global cash pools and trying to manage them more efficiently, and organisations are increasingly likely to take a global perspective on cash management. “An organisation with bank accounts across the globe may be cash rich in Turkey and cash poor in China, for example,” he says, “and these organisations now want their intraday and end of day balances automated, so that they can see if they are using their cash deposits in the most effective way, and avoid paying unnecessary overdraft fees.”
There was a time, when only the largest multinational organisations with harmonised ERP systems and IT infrastructures (and strong parent and subsidiary relationships) could hope to achieve real global cash management, but as Martin reports, there has been a trickle down effect. “The innovation happened at big multinationals. They were the evangelists, and they pushed the banks for better access to information and greater visibility,” he says, “but the entry point has now fallen to organisations with less than one million dollars in sales.” There are a growing number of affordable software tools available.
“There has been an upsurge of interest in acquiring up-to-date treasury management systems,” says Kevin Grant, chief executive of the specialist supplier IT2 Treasury Solutions. Because of the global financial crisis, and the financial and competitive value that corporates and financial institutions can gain from real time visibility of cash and risk, he suggests that implementing a Treasury Management System (TMS) is becoming best practice for an increasing number of organisations. “The spreadsheet solutions commonly used are now judged to be inadequate in terms of robustness, functionality, completeness and performance,” he asserts.
“A TMS can assemble liquidity and exposure detail from a range of sources,” says Grant: bank account balance information obtained directly from banks, exposures and cash movements from global networks of operating subsidiaries, opening and maturing deals and exposures, and other relevant cash flow information from ERP systems and similar sources. And because a TMS can be used to automate a lot of otherwise time-consuming and complex processes, it can make treasury more efficient internally and help it to better serve other parts of the organisation.
“The TMS can be set up to obtain and assemble all of this information automatically, so that the errors and omissions inherent in manual processes are minimised,” explains Grant, “and the reporting processes can be defined and operated automatically, so that the treasury team do not have to assemble and check the data prior to management reporting.” All of which is good for business cash flow management and the cash flow analytics that the stock market uses in company valuations – and could be increasingly important in a market where earnings visibility is at a minimum, valuation multiples are volatile, and the only proverb in town is “Cash is king”.
