In the decade after the Great Recession, money was essentially free, allowing treasurers to take a gradual approach to tightening cash-flow management. But in the aftermath of the pandemic, a jump in inflation followed by a rise in interest rates resulted in the restriction of working capital for many businesses. As a result, cash-flow management initiatives are now an urgent imperative.
Managing working capital using traditional approaches has been difficult, given the speed and magnitude of these economic changes. Companies have found it challenging to raise prices and cut expenses fast enough to offset their reduced purchasing power. Given our recent history of supply chain disruptions, slashing inventory to just-in-time levels is no longer an option.
In these circumstances, the least expensive way to sustain working capital is by managing cash flow — and the most efficient way to fast-track cash flow management initiatives is to collaborate with an experienced treasury management team.
A Tailored Plan
Not every bank has a treasury management group with the experience, expertise and technology to help their customers develop an individualized strategy for helping optimize their cash flow. Treasurers should look for a banking relationship with the tools to deeply analyze their payments and receivables ledgers, master the inflow and outflow of funds benchmark their activities against peers and work with them to develop a meaningful strategy with measurable metrics to achieve their priorities and goals.
“Treasurers should look for a banking relationship with the tools to deeply analyze their payments and receivables ledgers, master the inflow and outflow of funds benchmark their activities against peers and work with them to develop a meaningful strategy with measurable metrics to achieve their priorities and goals.”
For instance, a treasury management team should be able to conduct a detailed analysis of a company’s DPO (days payable outstanding) and DSO (days sales outstanding), noting the timing of routine transactions as well as payment methods and then contrast their findings to line of business or NAIC sector comparable as well as those of their competitors. If the average DPO in a given industry is 75 days and a company typically pays in 50 days, the bankers should be able to quantify the benefits of increasing the payment period, including in their calculations the cost of capital and opportunities costs. They should be able to conduct the same analysis for DSO and translate the additional cash on hand from both analyses into a metric that is meaningful to the company. If the company is publicly traded, for instance, this might be expressed in earnings per share. If the firm relies heavily on labor, this could be translated into reallocation of employees to other, more productive tasks.
A Comprehensive Approach
There is no one single solution to help optimize cash flow, and the right banking relationship should propose multiple paths forward, including a number of direct and indirect methods to help maximize cash flow and contribute to working capital, although digitization is at the heart of many of them.
For receivables, paper checks have a host of well-known weaknesses and vulnerabilities. They are expensive to process, lend them to fraud (which can cut into working capital) and inject uncertainty into the receivables cycle. As a rule, corporate treasurers do not take comfort in the phrase, “the check is in the mail.” Banks should be able to help clients accelerate and streamline the receivables process, for instance, by helping them establish online payments portals for their customers.
However, banks should do more than create a to-do list for treasurers to follow. An experienced treasury management team should dig in and guide companies through the conversion to digital payments and the process of optimizing DSO and DPO.
Quite often, these efforts can produce unexpected but significant results. For instance, upon reviewing a company’s vendor data file, the treasury management team might discover the potential to combine payments to branches of a single supplier into a single payment. Or they might identify opportunities for their clients to negotiate discounts. For instance, if they find that a healthcare company is using multiple vendors offering similar services, they could solicit bids for a consolidated business. While not directly tied to digitization, these savings are an offshoot of the process and can contribute to freeing up working capital.
Preparing for the Future of Cash Flow Management
The journey towards digitization and helping to optimize cash flow is not something that can be completed overnight. It is an ongoing process that requires a treasury management relationship that is willing to help companies assess, recalibrate and refine their efforts over time.
The advantages of continuous vigilance are substantial. A relentless focus on digitizing cash flow will have a positive effect on working capital by giving treasurers the tools to extend payments and accelerate receivables. At the same time, digitization allows companies to streamline and automate processes, helping to reduce costs and allowing personnel to focus on higher-level activities. And as more and more transactions are digitized, treasurers gain an increasingly clear and accurate understanding of their cash positions at a given moment, greatly facilitating their ability to deploy new cash forecasting and financial planning tools.
In fact, these new tools highlight an increasingly critical criterion for selecting a treasury management provider: it should be on the cutting edge of new and emerging technologies. With the introduction of new payment rails and the application of disruptive technologies like artificial intelligence and machine learning, treasury management is poised for still more transformation. Having a banking relationship equal to the challenge will be more important than ever for corporate treasurers.
