Here at Daston, the CFOs at the companies that we work with often tell us how managing cash flow is imperative to their business success. Over the last few years, supply chain disruptions, evolving customer expectations, labor shortages, and interruptions in global trade have brought it into even sharper focus.
If your company is struggling with poor cash flow and can’t figure out the culprit, read on. Here are some signs of poor cash management, a list of cash management essentials, and some tips for closing the gap between the two.
Signs of Poor Cash Management
Here are some signs that your company may be experiencing poor cash management:
- Poor visibility into cash flow. It’s tough to manage cash effectively if you don’t know how much is available, and companies often have limited insight into their current cash flow. Checking a single account balance doesn’t provide a complete picture because you don’t always know which transactions have cleared the bank and which haven’t, and if the current balance includes the previous day’s deposits or recent vendor payments. Getting this information often involves manually comparing bank transactions to actual accounting entries. Because this manual process is so time-consuming, companies may only perform bank reconciliation a few times per month. The rest of the time, there is an inaccurate understanding of current cash flow, so they are basing financial decisions on out-of-date information.
- Unreliable cash flow forecasts. To stay in business, vendor bills, employee salaries, and other expenses must be paid, even if cash isn’t on hand. To ensure they meet these obligations, companies often have a line of credit with lenders. Knowing how much cash you need in the short term to fund the business and the outstanding receivables is important. Unfortunately, inaccurate cash flow forecasts can lead organizations to request more credit than they actually need, which typically increases interest rates.
- Forecast quality impacts decision-making. Business leaders may become overly conservative due to a lack of confidence in the numbers, causing them to delay investments in marketing, inventory, or other growth initiatives. This can create a vicious cycle in which demand falls, stockouts lead to lost sales, and revenue falls, further impacting cash flow.
- Ineffective budgeting. Departmental budgets for the coming year tend to mirror the current budget, with slight adjustments to reflect future performance targets. Budget decisions may not consider which expense categories generate the most value or which investments are most likely to improve performance.
- Inefficient Spreadsheets. Companies tend to build their budgets in spreadsheets, which can be inefficient and counterproductive. Different versions of the budget may move from the finance team to department heads and back, resulting in changes being missed and unpleasant surprises when stakeholders receive the final numbers. Relying on spreadsheets also makes it hard for budget owners to keep track of expenses and avoid going over budget. While finance staff can see every transaction, managers in other departments rarely have the same access. In most cases, they only know which expenses have hit their budget after the fact, once accounting has closed the books for the previous month.
- Difficulty controlling spending. Another cash management challenge is a lack of effective spending controls. When first starting out, entrepreneurs have complete control of the checkbook, allowing them to personally approve every purchase. As the company grows, the purchasing process evolves, giving more people access to the checkbook or corporate credit card. Controlling expenses becomes more difficult, increasing the risk of excessive or inappropriate spending. The effects can be disastrous, including cash shortfalls, bounced checks, and even bankruptcy.
- Reactive Collections. In an ideal world, customers would always pay on time and in full. Since that’s not reality, companies frequently have delinquent accounts. Collections efforts often fall to accounts receivable staff and mainly focus on accounts that are long-past due, making it more difficult to secure payment. Waiting to act until payments are already late hurts cash flow.
Cash Management Essentials
Effective cash management means balancing cash inflows and outflows to ensure the company can meet its short-term financial obligations, make investments to drive growth, and retain sufficient earnings to satisfy shareholders. To achieve this balance, financial managers must always know how much cash the company has on hand, how much it needs, and how much it’s owed. These are the essential requirements for effective cash management:
- Real-time financial data visibility. Companies need access to real-time financial data—including the current balance across all accounts—and a complete record of all bank transactions. This information must be centrally available within an organization’s accounting system to ensure managers are working from a common source of data.
- Improved forecast accuracy. Finance leaders need to be able to forecast future cash inflows and outflows. The accuracy rate is affected by three things: the quality of the data used in the forecast, the validity of the assumptions built into the forecast, and the amount of time that has passed since the forecast was updated. To improve cash flow forecast accuracy, begin by providing centralized access to real-time financial, sales, and other relevant data. This will save time and ensure that forecasts are based on the most up-to-date information available.
- Eliminate unsupported assumptions. Rather than estimating collections based on instinct, companies should use historical transaction details to determine how much is likely to be collected during a given period. It’s also important to factor non-operational cash flows into the forecast, including planned capital expenditures, incremental venture investment, or other activities.
- Data-driven budgeting. A bottom-up approach that bases budgets on data, instead of desired outcomes, will deliver more consistent, more predictable results. The process should begin with an assessment of the current business environment and a review of past initiatives to determine which activities are likely to generate the most value. With this information, companies have a better understanding of what results are actually achievable and can allocate budgets accordingly.
- Strong financial controls. Effective policies and rules that protect organizations from financial fraud, serious errors, and intentional abuse of benefits, resources, or authority can also ensure compliance with government regulations and accounting standards. Many business management solutions help ensure compliance with financial standards, operations policies, and federal, state, and local regulations. Effective control processes can also help improve company performance by ensuring that actions taken by lower level managers have been reviewed and signed off on by senior staff.
- Proactive collections. While most customers pay their bills on time, collecting from those that don’t can be challenging. An effective collections process can keep days sales outstanding (DSO) under control. Automating customer communications ensures consistent follow up on past-due invoices, improving DSO, and reducing bad debt write-offs. Automation can even improve on-time payment by alerting customers ahead of time of pending due dates.
Manage Cash Effectively With Daston and NetSuite
Finance leaders must be able to pay employees and suppliers, service debt, and meet other financial obligations while also maintaining liquidity in case the economy falters. As a NetSuite partner, Daston makes this easier by helping keep cash balances up-to-date, increasing forecast accuracy, improving the budgeting process, and giving companies greater control of cash inflows and outflows with functionality, including:
- Automated bank feeds import account details nightly and allow for intraday updates, ensuring finance teams know which transactions have cleared and how much cash is available at any time.
- Cash 360 is a cash management dashboard that monitors cash flow trends and tracks total cash, accounts receivable, and accounts payable balances in real time, and displays a rolling six-month cash flow forecast based on current transactions and historical collections and disbursement averages.
- Planning and Budgeting Software automates the planning process, saves time, and improves data quality by eliminating the need for cumbersome spreadsheets. It provides sophisticated modeling capabilities, predictive analytics, and a powerful calculation engine that allows financial planners to quickly build and evaluate multiple what-if scenarios, leading to more informed, data-driven budgeting decisions.
- Automated Dunning Letters improve on-time payment by alerting customers before bills are due and helping to avoid write-offs for bad debt by maintaining consistent, proactive communications with delinquent accounts.
- Configurable Workflows help companies avoid overspending by enforcing approval policies and holding managers accountable for staying within budget. Embedded controls help save money by automatically logging all user activity, reducing the risk of fraud, and maintaining appropriate separation of duties among finance and accounting staff.
- DCAA-on-Demand SuiteApp ensures your system adheres to all government standards, which is a requirement for all GovCons.
Evolving business requirements, increasing stakeholder demands, and economic uncertainty mean cash management will remain a top priority. Daston provides the DCAA-compliant essential capabilities that your company needs to manage cash effectively.
Want to learn more about how Daston can help you more effectively manage your cash flow? Reach out for a free demo: (703) 288-3200