The Unseen Cost of Cash Flow Silos

By Marc Price | February 24, 2022
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Apart from being a bit of a tongue-twister, this topic presents a very real opportunity to tap into previously untouched sources for working capital.  Eliminating hidden costs naturally equates to a financial benefit, but tackling cash flow silos presents a genuine opportunity for immediate access to previously untapped working capital.

A recently commissioned study conducted by Forrester Consulting on behalf of Corcentric shows the majority of financial leaders intend to optimise cash flows to uncover funding for key business priorities.

We’re not just talking about cost control initiatives here. We’re talking about proactively tackling the cash flow silos of Accounts Receivable and Accounts Payable to achieve holistic cash flow visibility and control, ultimately unlocking working capital which could be used to improve liquidity and drive the business forward.

Why holistic cash flow visibility and control creates value

Better knowledge of cash position across a business enables more agile and forward-thinking use of capital from the balance sheet. Investment for growth may be unfairly constrained by a limited view of cash flow, with business leaders erring on the side of caution.

Cash flow management is integral to successful business management, allowing for capital to be wisely invested for maximum growth potential with minimal risk.  A 360-degree holistic view of cash flow — and the ability to forecast cash flow more accurately — allows for working capital to be extracted from both sides of the payments process.

Let us explore the potential value from each side of the payment process first, before uniting these to better articulate why findings show 82% of financial leaders are interested in enabling holistic cash flow forecasting.

How Accounts Receivable can be used to liberate working capital

Every day of sales outstanding is cash owed to the business, but not being put to work. By closing gaps in the cash-conversion cycle through faster and more accurate invoicing and collections, working capital can be extracted to fund business growth and other key priorities.

In the Forrester study mentioned earlier, 37% of CFOs either already have AR automation in place or plan to do so within the next 12 months. A further 50% expect to do so within the next 1 to 5 years. This overwhelming shift towards automation is driven by awareness of the valuable role it can play in improving invoicing speed and accuracy, as well as providing data to support more accurate cash flow forecasting.

But AR automation, as wonderful as it is, is only part of the story when trying to reduce days sales outstanding (DSO) to liberate working capital.  More dramatic solutions exist, such as Corcentric’s Managed Accounts Receivable, which not only accelerate payments by fixing DSO to a specific number of days (guaranteed, funded and underwritten by SLAs), but also support customers’ needs for lengthy payment timeframes.

It really is possible to reduce your DSO to just 15 days and allow customers the freedom to pay on 90 days. Take a look at this case study into how Daimler used Corcentric to take DSO down from 37 days to 15 days.

How Accounts Payable can be used to generate working capital

Flipping the concept of shortening DSO around to extending your days payable outstanding (DPO) may sound like an obvious extension of the above thinking; you hold on to your cash for longer, increasing the value of your liabilities, by extending your DPO, and put that cash to use where you need it. The longer you hold on to your cash, the greater the value of the working capital you have generated from this.

However, without meticulous management you could incur late fees, upsetting supplier relations. Or worse, you could starve them of the cash flow they need to keep operating and lose an essential supply of goods or services!

Some of the key considerations to take into account in such a process are outlined in our article about how to extend supplier payment terms.

However, as with accounts receivable, there are limits on what can be achieved through contract negotiation and the efficiency of AP automation. For a more dramatic extension of DPO, without requiring suppliers to wait longer for payment, supply chain finance can be combined with AP automation as a managed service. This removes the stress and administration of invoice processing and managing multiple payments and currencies. You don’t risk your supplier relationships, and you still retain visibility into what is being paid and when. Less hassle, more cash available and happier suppliers.

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Why AR and AP leaders need to unite

CFOs rely on cash flow metrics from both sides of the payment process to make informed decisions.   According to the Forrester study, one of the findings was that CFOs and other top executives need to own the vision of holistic cash forecasting and drive the necessary changes. AR and AP leaders should come together to support the CFO in this drive, owning their respective parts of this challenge. Strategic planning across both business functions should focus on ways to unite these two data silos, optimizing the flow of data on cash flow through to the CFO.

AR and AP are currently undervalued in their role as funding sources within most businesses. Leaders from both AR and AP functions within the business have an opportunity to demonstrate strategic value as funding sources, which strengthens the argument for accelerating automation plans for both areas, improving efficiency and job satisfaction (and productivity) as a result.

Cash flows through the business from AR to AP, so the business benefit from cash flow improvements made to one side of this continuous process can be lost if problems occur the other side of the process. The two sides must unite to provide holistic value. However, 68% of businesses feel that their company’s AR and AP processes are siloed, which works against the smooth flow of cash and data required to optimise the process as a whole.​

Uniting Accounts Receivable and Accounts Payable on one platform

Few businesses successfully unite AR and AP processes on one platform, and even fewer do it well. When asked, 75% agreed that their AR and AP management technologies are not integrated on a common platform.

Without uniting on one platform, AR and AP platforms must provide data flows which can be integrated to provide the insight needed for holistic cash flow visibility and control.

Streamlining data analytics from AR and AP information silos through one dashboard is far more empowering than using spreadsheets to analyse cash flow statements in one place. It’s also much faster and comprehensive.

Improved workflow for holistic cash flow forecasting should be high on the list of business process improvements to drive growth. Centralized data from AR and AP not only delivers real-time insights, but supports better risk management than relying on the analysis of disparate financial statements.

Accelerating the merging of cash flow silos

With supply chain challenges and inflationary pressures on business as we move through 2022 and beyond, there is added incentive to retain customers and drive new business by funding key business priorities.

Funding may come from many different sources, all with different levels of risk and cost, but liberating working capital from existing cash flows is one of the easiest and fastest routes to funding any business can embrace.

In recent years, regulatory requirements have limited some businesses in the funding options available to them, or made the process more complex and time consuming. Repayments to lenders may incur higher rates than in the past and the overall cost of external funding may prove considerably higher than raising this from cash flow optimization internally.

Furthermore, cash flow optimization through the merging of cash flow silos provides real-time insight into cash position, enabling smarter decision making and enhancing business agility. Business agility is always a competitive advantage, so don’t wait for your competitors to teach you this lesson.

The aforementioned Forrester study indicated that more than half (54%) of businesses have a shortage of internal talent and/or bandwidth to achieve a real-time view of the organization’s cash flow and working capital. As a result, many businesses will look for service providers to support them on this journey. Industry expertise and flexible solutions from partners like Corcentric can help you get there faster.

Don’t overlook the cost of ignoring your cash flow silos; strive for holistic cash flow forecasting to uncover working capital and fund your business priorities more quickly.

Download the study The Future of Finance: 360-Degree Cash Flow Visibility and Control to find out more.

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