Managing Cash Flow More Efficiently

Inflation remains higher than average and interest rates will also remain high for at least the next few months. Because of this, many U.S. companies are continuing to hold onto cash in case the economy takes an even worse turn. Through mid-last year, these corporations increased cash on hand to $2.35 trillion – 13% more than in 2022.1

It’s understandable that companies hope to counteract uncertainty with increased liquidity. How much cash businesses set aside depends on their individual capital needs. The U.S. Chamber of Commerce recommends at least three to six months of operating expenses.2

Beyond the recommended few months, does hoarding cash make sense – even in a weak economy? Not if it causes businesses to lose out on opportunities for growth or expansion. Investors expect companies to effectively manage assets to deliver consistent performance and might not look favorably upon excessive cash reserves.

If you’re not among the companies sitting on a war chest, what can you do to ensure you have the capital needed for daily operations and beyond? Improve cash flow management to maximize liquidity and returns.

Improve cash flow management to maximize liquidity and returns.

Increasing visibility, timely analysis and reporting, accurate forecasting and collecting payments faster are essential to improving cash flow.

1. Enhance visibility.

   Historically, organization-wide visibility into financial data was limited. “Treasurers need an integrated view of payment [and receivables] activities across the organization,” says Naresh Aggarwal of the Association of Corporate Treasurers. “This requires investment in technology and finding the right payment partners, whether they’re banks or third-party software providers.”3
   
   Solutions like banking system integration and data analytics offer greater transparency for better decision-making. Real-time visibility and tracking for payables and receivables enable finance professionals to quickly and strategically move cash and invest in assets that will generate cash flow, whether for short- or long-term needs. This is critical in times of economic uncertainty.



2. Return to forecasting fundamentals.

   Treasury professionals learned the importance of cash flow forecasting early in the pandemic, which disrupted everything from supply chains to revenue. In recent years, 68% ranked cash forecasting of “greater importance” as new obstacles like inflation and global unrest arose.4 It is also among the leading skills (53%) these professionals are using to help their companies navigate through tough economic times.5
   
   There are two methods of cash flow forecasting – direct and indirect. The direct method is internally focused and integrates transactional data, including payables and receivables, bank accounts and employee payroll. It is best suited to short-term planning needs. Indirect forecasting is geared to medium- or long-term projections and uses balance sheets and income statements to evaluate assets and liabilities. The further out the projections, the less likely they are to be accurate.
   
   The most popular model is the 13-week cash flow forecast because it is both accurate and timely (covers at least one quarter of analysis). Some companies are also blending scenario planning into forecasting to help better assess risk and ambiguity.



3. Streamline data analysis.

   Speed is essential when processing information. Outdated methods like spreadsheets and manual processing limit data’s effectiveness. Modern technology solutions accelerate information processing, improve decision making and deliver valuable insights through powerful tools like predictive analytics. Some programs integrate with existing systems, but one that offers Monte Carlo and time-series methodologies is ideal for risk analysis, planning and forecasting.



4. Align cash needs with funding.

   Companies have a range of short- and long-term needs. Effective cash flow management ensures funds are available for operational expenses as well capital-intensive future initiatives ― a distinct challenge in this strained economy.
   
   When it comes to where to keep short-term assets, 47% of finance professionals at firms of all sizes still prefer bank deposits. Government/Treasury money market mutual funds (18%) and Treasury bills (9%) are also among the choices.6
   
   For longer-term capital needs, businesses are turning to corporate bonds, raising more than $45 billion in January 2024.7 However, tighter lending restrictions and interest rates are plaguing commercial loans which dropped to $2.8 trillion in December 2023, an 18% reduction from the peak in May 2020.8 With investors and businesses leery of the financial future, value of North American equity financing dropped 49% in 2023.9
   
   Careful analysis, forecasting and planning are imperative to align cash flow with available funding sources.



5. Speed up payment collection.

   Fifty-five percent of all invoiced B2B sales were overdue in Q2 2023.10 There are multiple reasons for delinquent payments, including invoicing errors and other inefficiencies which are often the result of manual processing. In addition to wasting time and resources on research and follow up, these payment delays wreak havoc on cash flow. Automating receivables processing is necessary for businesses who want to better manage cash flow and liquidity. AR automation not only improves processing efficiency, but also reduces payment delays by 11%.11



6. Strengthen interdepartmental collaboration.

   Treasury and other corporate departments have worked independently in the past, but companies now realize the value of collaboration. Every department contributes to the company, whether it’s inventory management, product planning, or sales. Increasingly, Treasury supports internal teams with financial data and analysis. But collaboration among various departments also enables vital information exchange that not only supports cash flow management efforts but is also critical to setting overall business strategy.

Businesses can efficiently manage cash flow – even in an unstable economy.

No one is certain when the economy will fully recover. But businesses that remain focused on effectively controlling cash flow will better adapt to the risks and opportunities presented.

For more information, simply complete a short form and a Synovus Treasury & Payment Solutions Consultant will contact you with more details. You can also stop by one of our local branches.