Performance Improvement

April 28, 2021

How AR Automation Tools Help Close the Cash Flow Gap

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A business can close the year showing a solid profit but still find itself out of money. Receipts often lag behind sales, suppliers expect payments and loans come due — creating a cash flow gap. A positive cash flow is critical to your business’s operation & success, and is a key indicator of a healthy, well-run company. Surprisingly, many companies do not have real-time visibility into their cash positions, robbing them of the ability to make strategic decisions and even potentially putting them in a position of insolvency. What is the cash flow gap — and how can AR Automation applications help close the gap?

What Is the Cash Flow Gap?

A cash flow gap is defined in a few different ways, but simply stated, it is the time between you paying your supplier and your customer paying you. For instance, if your supplier terms are 30 days and your customer terms are 60 days, you have a cash flow gap of 30 days. Even if the terms are equal, there could still be gaps between the time you must pay an expense and when you collect the revenues related to the expense. The graph below helps illustrate the cash flow gap.

There are several ways to narrow the cash flow gap, with the most obvious being to increase the payables period, decrease the collections period, or increase inventory turnover. In our last post, we offered some suggestions for optimizing payable processing, and we will tackle inventory optimization strategies in the future so make sure to circle back. Decreasing the collections period is something we’ll cover in greater detail in our next post. One thing is certain: if your goal is to shorten the cash flow gap, you first need deep visibility into your cash flow.

AR Automation Applications Help Close the Gap

We expect near real-time visibility from our devices, cars, banks and eCommerce transaction, so why don’t companies expect the same when it comes to their cash flow?

While most accounting applications provide some form of cash flow analysis, they typically do not provide the deep, real-time visibility and forward-looking capabilities that software actually designed for that purpose can. This often leads businesses to use spreadsheets in an effort to gain needed insight. Don’t get us started on spreadsheets – “spreadware” we’ve taken to calling the practice. Fortunately, there’s a better way.

AR automation applications provide visibility into your organization’s current cash position and forecasts that position out several weeks to drive critical decisions. These applications bring this all-important financial data into one place by integrating seamlessly with your accounting application and bank accounts.

Cash flow forecasting gets further complicated if your organization has multiple entities, locations or currencies. Look for an AR automation solution that is powerful and agile enough to deliver cash flow insights across multiple dimensions – companies, entities, departments, projects, currencies, systems and banks.

How Artificial Intelligence is Changing Cash Flow Management

There’s some amazing progress happening in this area with the addition of Artificial Intelligence (AI) and Machine Learning (ML). For example, one innovative application, Payference, uses AI and ML to study what’s going out and what’s coming in, then uses predictive analysis to create accurate forecasts and projections, helping you manage your cash flow. By using AI to continue to learn by studying your AP & AR over time, the solution then makes suggestions on how you can improve your cash flow based off your specific activity. There are other good AR Automation applications, and not to get salesy on you, but we can certainly help you identify the best solution for your organization.

With accurate, real-time cash flow information, you can identify potential trouble spots, such as the time periods where your outflow is expected to exceed your inflow. Armed with this information, you’re in a better position to take action — emphasizing collections, for example, or tapping into a loan or line of credit, renegotiating supplier terms, or incentivizing customers to prepay.

A robust, predictable cash flow is imperative for every company. It makes sense to leverage technology to help optimize cash flow and minimize the gaps — while you wait for the profit you see on your books to become a reality.

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