The role of cash in the modern business

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In the world of modern business cash may still be king, but in spite of the increased cashflow visibility afforded by new technologies many companies still struggle to get to grips with it. So what can be done? Tom Herbert investigates.

As the old adage repeated in a million business seminars goes, when it comes to business cash is king. Among many other things, cash provides the necessary working capital to develop, market, and deliver the underlying substance of the modern organisation.

But while the king sits comfortably on his throne, the tech revolutionaries are sharpening their guillotines, ready to seize power in form of high-powered, real-time cloud accounting tools.

Such tools do offer better visibility across all areas of the business, including cashflow, but they also build greater expectations. Give people information and they want more!

The CFO in the boardroom presenting improved information to the board will be asked: “Why are we always hampered in our growth because of a lack of cash? Why can’t we generate the cash to grow more?”

Hugh Scantlebury, director of cloud accounting developer Aqilla, has consulted on many software implementations within finance departments. His golden rule is that “the technology has to be there to support the behaviour”.

If a business is measuring its cashflow better, it should also be managing it better. But for all the proactive, real-time information and visibility new tools provide, many organisations are still struggling.

So what can finance leaders do to grab the cashflow bull by the horns in 2017? And how can technology help?

Forecast your cashflow

Scantlebury says forecasting cashflow is vital to business success: “You’d be amazed at how little cashflow reporting actually gets done by businesses. Cashflow just sort of happens, and if it doesn’t happen in the right way they go into panic mode. If you can anticipate what’s likely to happen based on things like projected due dates - that goes a long way.

“There’s no excuse. Current software allows you to budget and forecast your cashflow and report your actuals against them. It is helpful to know not only what has happened but what is going to happen.”

Manage your terms

The gloriously optimistic view that corporations pay on time and have good terms with customers sounds great in theory, but in reality people still forget or delay payments.

Managing terms effectively with suppliers and customers is a sensible way to ease the cashflow burden and avoid overstretching in terms of capital and other business demands. Businesses often underestimate the need for decent levels of working capital to tide them over from incurring the expenses, delivering the products or services and the customer paying their bill.

Do the dirty work

One of the most important parts of cash management is simply getting people to pay the money they owe. A business that gets this right will go a long way. Doing this dirty work to keep the cash coming in is a business fundamental that is often overlooked.

Bank data integration makes it possible to pull transaction feeds from the bank into the accounting system for reconciliation, which gives the business real data rather than figures that could be out of date by a couple of weeks. Being able to scan today’s balance enables the organisation to save time and avoid chasing customers for items they have already paid for but forgot to communicate.

Third-party collection apps such as Satago and Chaser have also carved out a niche among cloud accounting users by automating the process: collecting money from customers who owe it and following up when they don’t pay. Often a couple of automated reminders will save the credit control team from having to pick up the phone and chase payments.

Check in the cheques

Hugh Scantlebury encourages all new customers, even if they’ve got cheques, to consider switching to a bank payment system instead.

“Cheques are a pain for cashflow management. They create a knowledge vacuum between the system that is saying one thing and the bank which is saying another,” said Scantebury. “Reconciling that all together is a challenge.

“Using a bank payment system settlement times are much quicker and your supplier relations will be better. If you can get your customers into the same behaviour it can really benefit your cashflow – especially if you’re doing regular business with a customer. It eradicates the need to chase them up because they’ll get into a habit that benefits both parties.”

Better reporting and KPIs

Scantlebury offered an example of the type of reporting he advocates to ensure better cashflow: “One of our customers is a large recruitment company that provides staff for the education, healthcare and legal industries. When their people go to a job like a two-week stint as a locum doctor in an NHS hospital, they expect to be paid quickly by this company.

“The company then has to worry about the machinations: how to get the cash out of the NHS, and managing that delay if someone goes off sick or they lose the electronic timesheet.

“This organisation has an average debtor day measure they evolved to manage how well this is going. There is a smart KPI (key performance indicator) that sits on their CFO’s homescreen dashboard and they can see minute-by-minute as things happen within the business – whether within tolerance, going badly or looking good.”

The logic behind the reporting tool reassures the CFO. “They can look at this number and say. ‘We’re okay today.’ Next week we’ve got to do x in order to maintain that sort of performance,” said Scantlebury.

There are other steps and tools he suggested to proactively manage cash:

  1. Set realistic terms for conducting business.
  2. Use forecast tools to plan and anticipate impact on cash.
  3. Monitor cash collection performance by individual account.
  4. Use credit and cash responsibly.
  5. Pay suppliers and staff efficiently (and fairly).
  6. Trade responsibly. Don’t damage your reputation by being too tough on customers or being held a poor payment risk by suppliers.

What processes or tools do you use to manage your cashflow effectively?

Further reading

About Tom Herbert

Tom is acting editor at AccountingWEB, responsible for all editorial content on the site. If you have any comments or suggestions for us get in touch.

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26th Jan 2017 13:01

Good piece.
What about factoring?
(And you mentioned Satago, but they are more than just a "chasing" tool , though a rather good one, but are a source of finance for sme's, different from factoring.)

Thanks (3)
to Floating Point
26th Jan 2017 13:39

Thanks Floating Point :-) Apologies if I didn't make it clear that chasing is only one of Satago's functions.

And we'll definitely be looking at factoring in closer detail a little later on in this cash management series.

Thanks (2)
26th Jan 2017 16:23

I trialled the Satago add on for QuickBooks last month and it was very impressive considering its free.

Has anyone had any experience with Crunchbooks for cashflow management as I am keen to automate ours.

Thanks (3)
to 12jpotts
27th Jan 2017 10:51

That's what I like to hear! Thanks for the nice feedback about Satago. :)

Thanks (1)
26th Jan 2017 16:29

We have looked at selective invoice financing to cover our cashflow risk on larger projects. It appears to be nice alternative to the more expensive complete invoice financing arrangements which tend to have a lumpy fixed fee. If like us the majority of your clients pay within terms this can be useful when dealing with some of the big boys (especially those who want 60 day terms).

Thanks (3)