Every finance function works differently, but there remains one truth: you can't manage what you can't measure. Cash flow management is the key to unlocking your business's potential - it will allow you to make the right decisions and attract the right clients.
By performing an accurate cash flow analysis, businesses can be proactive instead of reactive. Cash flow analysis confirms a business's most profitable revenue streams or identifies areas where cash is deficient, with timely updates on when and where money moves within accounts. Essentially, cash is the fuel that keeps the engine running as it is the lifeforce of all businesses.
Cash flow analysis is important to businesses because it can help them predict shortages and income gaps, create more accurate future forecasting for planning and even provide stakeholders with timely insights to avoid going into the red. Successful CFOs today are using Cloud technology for cash flow analysis.
Following on from our Introduction to Cash Flow Management, in this article we are going to focus on the strategic aspects of how Cloud technology can be used to track business cash flow.
Why choose Cloud technology to track business cash flow?
Cash flow management requires a thorough understanding of your company's financial structure from a 360-degree perspective. To put it simply, the finance function needs an accounting software solution that provides visibility to key stakeholders and gives the finance team access to effective tracking of the business' cash flow.
As businesses have had to shift operations so quickly in the last year, financial models that provide a reliable estimate of future financial position are becoming increasingly sought after by both large and small enterprises. There are now a number of platforms and technology solutions that track cash information and predict profits versus debt in real-time.
Modern cash flow analysis tech relies upon APIs, AI, and machine learning to provide accurate, real-time data, but what are they?
Application Programming Interface (API)
This is the computer interface between multiple software intermediaries, which can be set up to move a group of data from A to B using defined parameters. It allows the data to be extrapolated and then used by other reporting programmes.
Artificial Intelligence (AI)
It's an automated system that does all the work without the need for manual intervention. This is used to improve data and predictions based on the raw data provided by API’s for example.
Machine Learning (ML)
Involves a subset of AI in which information is learned without being explicitly programmed. Particularly helpful for learning repeat invoicing patterns within finance or holiday/absence management to aid resourcing.
Through powerful AI solutions, such as Advanced Financials accounting software, you can derive insights through real-time reporting on metrics that, traditionally, may only have risen to the surface after an audit. By using these models, your business will be able to make more informed decisions, modify payment plans, or even revamp programs that aren't working well.
Finally, the ability to draw down volumes of data and interpret key findings can give CFOs and Finance Directors powerful insights when forming strategic business decisions.
Seven financial drivers that technology could track via business cash flow software
As cash flow is crucial to your business's success, looking at what drives it is a good first step. Overall, there are seven key financial drivers that drive cash flow.
All of these provide unique information which can be analysed together to identify opportunities to improve cash flow, eliminate unnecessary spending, and make more strategic business decisions.
Understanding how to leverage this information to your advantage will improve your cash flow, which in turn will boost your company's profitability.
Here are the seven key drivers of cash flow
Let’s begin with the drivers that focus on specific percentages which significantly influence your business. You can either boost your bottom line or ruin your business's cash flow by even slight variations in these percentages:
1. Revenue growth percentage
Increasing cash flow would seem to mean selling more. But does it? Although increasing your sales might seem to help your cash flow, it can sometimes worsen it as sales require money. It can be expensive to produce your product, maintain it in stock, and then sell it, while service-oriented businesses require more paid hours to complete new jobs when sales increase.
Bear in mind that there is no guarantee that you will be paid by your customer right away. To cover labor expenses and operating costs, you must have enough money in the bank. In other words, increased sales can decrease your cash flow drastically if you are already short on resources.
2. Overhead percentage
Rent, Internet service, phone bills, light, power, and even payroll are all overhead costs that occur each month. But just because they are monthly expenses doesn't mean they always incur the same amount each month. For example, the costs of electricity can quickly rise when it is unseasonably warm or cold in the office.
You should track your budget to maintain your overhead percentage (and improve cash flow). Monitor your actuals against budgets for overhead to keep your overhead percentage stable and to better budget for future expenses.
3. Cost of goods sold (COGs) percentage
Cost of goods sold (or cost of services) has the most impact on cash flow within your business. It is essentially all the costs linked directly to the production or delivery of your product or service. COGs can be reduced directly by buying materials in bulk, negotiating with suppliers, and reducing waste. Reduce your COGS even by 1%, and you will notice an improvement in your bottom line.
4. Price change percentage
The price change percentage refers to a change in price that may be either an increase or decrease or a temporary reduction. The variable cost of living and inflation makes it impossible to sell products or services at the same price for years on end while still profiting. For example, it can be difficult to predict things such as a rise in petrol prices or in food costs. Bearing this in mind, the margins of your company need to be flexible enough to accommodate these variations, which is why monitoring them is so crucial. If you're experiencing shrinking profit margins, then it may be time to reassess your rates.
Next, we will examine the drivers that influence cash flow activity throughout each business month. By tracking these metrics, your business can identify patterns and address discrepancies in its money flow.
Gathering this data can also help forecast cash flow so you can make informed decisions:
5. Work in progress days
When dealing with a service-based organisation, work in progress days refer to the period between when wages and materials are paid for and when the job is finished and invoiced. For product-based organisations, inventory days refer to the average number of days that a product is on hand before it is sold. The easiest way to improve cash flow here is to streamline the job management process by optimising workflow on a job to reduce the number of days that a job remains in progress, which benefits cash flow and improves customer satisfaction.
6. Accounts receivable days
Considering that payment is made on credit terms, the accounts receivable days represent how long it usually takes for a customer to pay. Invoices may have a repayment term of 30 days that the customer must pay in full. Unfortunately, customers don't always pay on time. Although the repayment term is 30 days, the actual number of days it takes to pay off the account may be much longer. A discrepancy in when an invoice is created and when it is paid in full can adversely affect a business' cash flow.
7. Accounts payable days
Accounts payable days are the average number of days it takes to pay vendors or suppliers. If a vendor supplies coffee to your business monthly and sets payment terms of 30 days, your business will be required to pay the invoice in full within that time frame. Unlike accounts receivable, vendors and suppliers are usually paid out faster than cash flows into a business, which can cause cash shortages. Without a cash reserve in the bank, a business can only operate at a limited level if its money is spent on suppliers and customer payments are delayed.
With Advanced Financials accounting software, CFOs can...
Ensure accurate cash visibility with automation
A business' cash flow analysis and reporting can be done electronically, providing a real-time and accurate picture of its entire financial picture. When all corporate accounts are linked to an expense management system, every transaction can be viewed, each account can be managed, and anomalies can be flagged.
Track cash more easily
Advanced Financials allows instant cash transactions and tracking, which saves a great deal of time and labour. Manual tracking can take hours but tracking cash in the Cloud takes only a few minutes. Email messages, electronic receipts, and bank accounts can be incorporated into AI and APIs to allow for real-time expense reporting. Having easy-to-use Cloud technology also makes employees more likely to stay on top of expenses, gives them more flexibility to make critical, timely decisions, and helps to streamline the financial process.
Provide stakeholders with access to cash analytics
When accounts are merged into a single cash management system, employees can find the necessary financial and transaction information without the need to go back and forth between IT or adjacent departments. Any team who uses it is also able to recognise patterns of spending behavior across the entire business, not just for one department.
Using Cloud technology to get a 360 view of business finances
It's unnecessary to invest vast amounts of time and effort for a less accurate view of daily operations - cash flow analysis technologies work for businesses and allow finance teams to benefit from greater transparency, more detailed data, and better forecasting.
Advanced's Advanced Financials is a robust accounting software designed to help you achieve:
Reporting that is flexible
Easily access meaningful financial data with the help of budgeting and forecasting capabilities in the Cloud which are more flexible and offer improved reporting.
A higher level of accuracy
Make informed decisions based on accurate information about the costs of projects and service usage figures available at your fingertips. Using direct access to data, create reports on demand while tracking spending against original forecasts and analysing it in different ways.
Streamline approvals and authorisations
Achieve clear visibility of progress via built-in workflows and embedded version history help minimise errors and speed-up approval processes.
Increase workplace productivity
By eliminating duplication of effort, finance teams can devote more time to value-added tasks such as financial analysis, risk management and strategic planning.
Processes that work
Ensure data is always submitted in the right format with integrated budgeting and forecasting systems.
Enhanced scenario planning
In contrast to spreadsheets with complicated macros, centralized budgeting and forecasting solutions make it easier to factor in different scenarios and support longer-term financial planning.
Alternative budgeting models
Allocating and monitoring department expenditures is only one aspect of smart budgeting. Integrating systems allow forward-thinking companies to make better decisions by providing real-time, accurate and consistent data.
Efficient and cost-effective
By eliminating manual consolidation of financial data, you'll save time and money. Reduce the time required to produce an annual budget from several days to just minutes and monitor and improve financial performance.
Bring your finance team into the future with Advanced’s Advanced Financials Software. Spot problems, track business growth and success to ensure your finance function leads the way in your organisation’s growth.