Practical Tips

5 Steps to Achieving Efficient Cash Flow Management

by Envoice
10 min read
Source: Pexels

Insufficient cash flow was the biggest challenge businesses had during the COVID-19 outbreak in 2020. More than 85% reported high or medium financial impact amidst the economic fallout, government-imposed lockdowns, and competitive pressures.

Organizations already struggling with unstable cash flows and low cash reserves became particularly vulnerable. Without government support like stimulus initiatives and relaxed insolvency policies, many businesses would go bankrupt – highlighting the importance of optimizing cash flows.

Effective cash flow management will play a vital role in business recovery.

With continued uncertainty due to COVID-19, geopolitical tensions, high inflation, and surging energy prices, companies should constantly cash flow and maintain excellent financial health. Proper cash flow management helps the business anticipate potential interruptions and maintain sufficient cash buffers.

Even if existing cash management practices work, these five steps can help your organization create best practices in managing cash flow to avoid a cash crunch, especially during times of disruption.

1. Modernize Sales Invoice Processing

Businesses need sufficient cash buffers to support operations. Unfortunately, many companies struggle with reducing the cash conversion cycle and predicting future cash flow.

Focus on Reducing Late Payments

Across Europe, late payment remains a serious issue. In 2021, 87% of European companies focused on strengthening liquidity and cash flow as their top strategic initiative. Among the surveyed companies, 50% consider late payments problematic, while 29% find it highly problematic.

Late payments influence casf flow
Source: Pexels

Strategies to help companies improve accounts receivable turnover include the following:

  • Offering early payment discounts
  • Building strong client relationships
  • Shortening payment terms
  • Issuing accurate invoices on time
  • Follow up on late payments

All these strategies could be easier to implement with modern technology.

Automate Invoice Processing

During the early days of the pandemic, companies scrambled for cash because of reduced economic activity.

Companies ill-equipped for remote operations felt a harder impact due to internal processing delays. Businesses struggled in preparing and sending invoices offsite.

Delays in mail delivery made the problem worse.

Businesses had no choice but to make do with existing tools ⁠—scanning paper-based invoices or sending PDF invoices became the norm. Unfortunately, this system adds more manual processes that are both time-consuming and prone to error.

Automating sales invoices is one area of improvement to the collection process that could enhance cash management. When companies send invoices on time, customers are more likely to pay on time. Meanwhile, sending invoices late gives the impression that paying past the due date is acceptable.

Use E-Invoicing to Get Paid Faster

Accounts receivable teams in large companies and governments across the globe are speeding up the adoption of e-invoicing to improve accounts receivable management. And, small businesses can gain strategic advantages in doing the same. When companies send invoices faster, they get paid quicker.

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Automated sales invoice creation reduces time spent in preparing invoices. Invoice delivery also happens almost instantly since customers receive invoices via email or another channel.

Reducing processing time for sales invoices increases productivity while cutting down costs.

An Australian study finds that e-invoicing helps businesses save about $20 for each invoice. Funds allocated for hiring more people to process invoices could go to other revenue-generating initiatives.

Another advantage of using e-invoicing is having one platform for monitoring invoice status. Knowing which accounts are current and which ones are past due improves account monitoring so you can send collection reminders and adjust cash flow projections as needed.

2. Ensure Financial Data Reliability

Financial data for cash flow management
Source: Pexels

Accurate and reliable financial data is essential in making financial decisions. However, ensuring data accuracy and reliability is a constant struggle for many companies.

Often, finance teams have limited time for cash flow statements and other financial reports. Raw data is almost always messy, making it harder for smaller teams to prepare reports on time.

Make Financial Forecasts More Accurate

Many companies make significant decisions based on outdated or incorrect financial information.

One survey revealed that as many as 69% believed their company had done so.

Human errors, multiple data sources, clunky technology, and lack of automated controls were among the contributing factors cited for low confidence.

If not corrected on time, financial misreporting could have dire consequences for the business. About 40% believed that those errors could potentially affect their company’s ability to secure additional investment and more debt.

The quality of financial information has a significant impact on any organization. A company may run into cash flow problems if executives approve a project based on inaccurate financial statements.

Regrettably, improving data hygiene comes with a high price tag. The survey also reported that 22% of the C-suite respondents believed that it takes 10 days a month to fix financial information.

Speed Up Financial Report Processing With Smart Technology

Automation provides a convenient and cost-effective solution to improve the accuracy of financial reports like cash flow statements.

Compared to manual data entry, automated data extraction requires a shorter invoice processing time. Using modern technology also reduces the risk of human error in financial reports.

How does automated data extraction work?

Most companies use OCR and AI technology to automate manual tasks. Envoice, a smart expense management platform, provides users with a dedicated inbox for invoices. Intelligent tools extract invoice information from emails, PDFs, and photos sent to the inbox or uploaded to the app.

In less than a minute, SmartExtract enters invoice information into the system, and the data becomes available for processing. Automatic data capture reduces errors and the workload for you accounts payable employees who only have to verify data.

When finance leaders have access to an accurate and reliable cash flow statement, they can have a stronger grasp on the company’s financial health and make decisions that will not strain the working capital.

3. Simplify Invoice Approval Workflows

Manual data entry and inefficient processes are the top challenges in procurement, but unclear or lengthy requisition or approval process is a close second.

Improve Invoice Visibility

Efficient expense management workflow is necessary for enhancing a company’s cash handling capability.

Finance leaders need visibility on the status of all company expenses and invoices across the workflow. Yet, many organizations struggle with confusing and inconsistent accounts payable processes that hinder visibility into the company’s cash flow.

One issue lies with having too many systems for processing expenses.

A survey reveals that only 54% of companies use a centralized procurement department ­– the issue is even worse for small and medium enterprises.

One in three SMEs has no formal procurement structure in place, and purchasing duties become the responsibility of multiple individual employees, teams, and departments.

When inconsistent and multiple approval processes exist across the organization, tracking cash flow becomes harder.

Manage Cash Flow by Tightening Expense Control

Having a single approval workflow is another step companies can take to fix cash flow issues. Ensuring all invoices go through a single approval channel allows managers to check what expenses are in the pipeline.

Visibility across company spending allows businesses to reduce cash reserves to optimize working capital as surprise expenses are less likely to appear.

Companies with effective cash flow management are in a better position to launch strategies that support growth like increasing capture rates for early payment discounts and pushing with expansions as they have more cash.

Replacing excel-based and inadequate ERP-based systems is one way to enhance spend visibility.

Cloud-based approval workflows using automation allow employees to initiate invoice approval workflows from anywhere. Not only will one workflow simplify the process, but it will also ensure uniform application of the company’s expense policy.

4. Create a Single Source of Truth

Every department in the organization plays a key role in achieving cash excellence. Without input from various departments, forecasts will not be complete or insightful.

Communication is so invaluable that time spend on voice and video calls almost doubled while IM traffic grew by 65% as companies transitioned to remote work.

Demand for collaboration saw an upward tick across organizations — collaboration time per week saw a 20% increase from 21.4 to 25.7 hours between March to July 2020.

Department role in cash flow excellence
Source: Pexels

Put All Expense-Related Communication in One Place

While the availability of collaboration tools made coordination easier, it became much harder to keep up with financial information coming in from different sources.

Discussions about a Purchase Invoice sent via email may happen over Slack or another communication tool or through SMS.

On average, employees spend 20% of the time – which roughly translates to one day a week -searching for information or finding a colleague who can assist with certain tasks.

Consolidating disparate systems and having a single source of truth within the organization could be the answer.

A system where all relevant teammates can provide additional information and notes in the invoice approval workflow allows the whole team, including your bookkeeper, to be on the same page.

Set Up Clear Audit Trails

Since approvers can find all expense-related information in one place, it also cuts down back-and-forth emails, allowing the company to pay invoices on time, improve capture rates for early payment discounts, and improve relationships with suppliers.

Moreover, a clear audit trail for approved invoices and a log of actions taken allow managers to review past transactions from years back.

Using a platform where team members can add comments, request additional information, or make edits simplifies collaboration and makes life easier for everyone.

5. Perform Spend Analysis

Tracking how much cash goes to every expense category is another avenue for enhancing cash flow management. Companies should understand current spending patterns to cut non-strategic expenses and impose budget cuts on areas that will not negatively impact business operations.

Implement Strategic Budget Cuts

In 2020, 90% of companies reduced their budgets, and one strategy that did not work was making blanket cuts with unrealistic targets.

Cost-cutting initiatives across the board harm growth and only 43% achieve the level of cost savings forecasted in the first year.

Rather than making blanket cuts, businesses found more success in increasing accountability and targeting areas where reducing expenses will not hurt the organization. To achieve this, companies should identify opportunities for cost reduction across multiple categories – and this requires visibility into external spending.

Invest in a Smart Expense Management System

Having an expense management system that provides insights and transparency to where and how spending happens is one solution.

Tools like Envoice where employees can tag expense categories as they request invoice approval or reimbursements, allow companies to access uniform data for spend analysis.

A deep-dive analysis of expense data in digital format allows companies to uncover cost savings.

Trends and spending patterns could reveal potential strategies like using a single vendor rather than buying from multiple vendors to access trade discounts and reducing off-contract buying to economize.

Leverage Technology to Improve Cash Management

Filling technology gaps should no longer be a way of coping but the goal for businesses looking to optimize flows.

Cash flow management
Source: Pexels

Automation allows companies to do more with leaner finance teams. It’s not surprising why 71% of boards of directors consider digital technology investments as a top business priority. However, businesses cite competing priorities, lack of budgets, and the fact that current processes work as the top three barriers for adopting third-party procurement software that could improve the cash flow forecast.

One way to improve a business’s cash flow is to use a cost-effective, cloud-based provider to support a company’s digital transformation. Intelligent automation platforms like Envoice integrate automation across sales and procurement to augment existing systems ­and make them even better.

Discover how Envoice empowers companies to embrace smart accounting, unlock significant cost savings, and improve cash flow management by modernizing sales and procurement processes.

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