Finance and Accounting

Cash flow optimisation techniques

Cash flow is essential for every business to meet its short-term goals. However, during the pandemic, 65% of small businesses struggled or failed to pay their operational expenses.Without sufficient liquidity, businesses could be profitable on paper yet go bankrupt. This raises a few important questions:

  • How to have a structured approach to manage cash flow?
  • How much cash reserve should a company have at any given time?
  • How to optimise cash flow to prepare for crises?

Cash flow analysis and its importance

Cash flow gives you a picture of how your business earns and spends the money. It is different from profit, which is merely the income minus the expenses. Cash flow analysis tells you about:

  • Your biggest customers
  • Your largest expenses
  • The amount of liquid cash you have to meet for any short-term expenses

Cash flow analysis helps you meet financial obligations while investing enough for your business growth.


Seven elements of managing cash flow

Small business cash flow management is a structured approach, and traditional methods of accounting, invoicing, and billing don’t make the cut. You need to optimise and thoroughly monitor the following elements for innovative methods.


Receivables

By giving excess leeway to their clients, companies reduce profitability even though they may have lots of business. Optimise receivables by:

  • Aligning sales with finance: Define payment terms for both the customers and the company and align them with the customers’ master data.
  • Having an efficient billing process: Automate the billing process, which includes approvals, error correction, and timely bill dispatch. Ensure that someone is in charge of the process.
  • Defining a payment collection strategy: Have a mechanism to know which payments are meeting the deadlines and will soon be overdue. Have a formal reminder and escalation process.

Payables

Payments depend on your supplier’s terms. Here is how you can optimise them.

  • Negotiate the payment terms upfront: We often negotiate the prices but not the payment terms. It is best to discuss and mention them in the contract.
  • Get visibility on procurement data: You need a system to match all purchase orders with respective invoices. With a graphical view of the procurement data, this helps identify problems quickly.
  • Optimise the timing of the payment: Pay on time but don’t rule out advance payments. If you have surplus cash, early payments can get you discounts in the future.

Inventory

Companies that manage inventory not only have to invest in a physical space but also the stock. You can do that efficiently with:

  • Stock minimal inventory: Businesses do not want to overstock or understock their warehouse. With technology that predicts demand, you can manage the supply and ensure sufficient cash liquidity.
  • Monitor the demand: Monitor how the demand changes every week or month or during festive seasons. If you have a bird’s eye view of this data, you can choose your suppliers wisely.
  • Get a real-time view: The right systems give you a real-time view of the stock and its location across your warehouses.

Cash flow forecasting mechanism

Have a forecasting and review exercise once in 12–18 months. The direct method uses a cash-based forecast (rather than accrual) for short-term planning. The indirect method uses income statements from balance sheet day sales and payables outstanding and inventory for long-term planning.

Cash flow statement

It indicates a company’s financial health and comprises cash from operating activities, investing activities, financing activities, the net change in cash, and net cash.

Actionable outputs

Outputs should provide key areas for action to maintain operating cash by investing it strategically.

Review schedule

During business as usual, you could review cash flows once a month. But during crises, you need to perform the exercise weekly. Compare the forecast with the actual statement to identify variance and improve accuracy.

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How can Infosys BPM help?

The order-to-cash (O2C) solution uses technologies such as AI, ML, RPA, and AR to improve your financial cash flow efficiency. You get superior experience and reduce any frauds and customer defaults, with solutions such as:

  • Quote and order processing
  • Billing, invoicing, and collections
  • Dispute management
  • Reporting
  • Revenue leakage analysis
  • Cash flow analytics

View the complete O2C solutions by Infosys BPM.


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