Every business leader knows how critical revenue and profit are to a company's long-term success. But there's another factor that's equally important to an organization's day-to-day health: cash flow.
If a company runs out of money, it won't be able to pay staff, pay for office space, pay vendors, pay interest, pay for inventory, or pay for anything. Money on hand is what keeps the lights on — literally.
That's why managing cash flow is so important. The calculus is pretty simple: If an enterprise doesn't accurately measure and manage cash flow effectively, it's likely to suffer from business volatility and won't be able to make sound financial decisions for the future. Furthermore, it may risk overtrading and ultimately going out of business. Sadly, too many companies go under not because they're poorly managed or have a bad business model, but simply because they lack liquidity.
Managing cash flow is even trickier for organizations that sell services rather than just products. Accounting firms, consultancies and software companies typically offer a complex variety of billing arrangements that include fixed-price fees, time and materials, additional ad hoc charges, and milestone-based payments. In addition, many service companies have started to offer subscription-based services. These not only add greater complexity to invoicing, but also can make revenue recognition extremely complicated.
A single source of truth
Many companies still have to rely on siloed, disconnected processes to manage cash flow, making it much more difficult to forecast accurately. Such companies may use a CRM system for managing sales, a different system for managing service delivery, and an old legacy system for managing invoices and handling the accounts. These archaic systems will typically be supplemented by a collection of spreadsheets, resulting in a mess of disparate tools all detached from one another.
This disconnection causes confusion and process inefficiencies that inevitably lead to errors and delays. When there's an inconsistency between what's been sold and what's been invoiced, customers won't pay their dues — they'll dispute their bills, they'll hold off payment, and ask for discounts or even write-offs. In summary, if you give customers a reason not to pay their invoices, they won't, especially in a tight economic environment, and this inevitably results in unacceptable levels of outstanding debt.
Companies require a common source of truth that is enterprise-wide. One that provides a shared source of data for accounting, operations, billing, sales and all the other divisions that impact service delivery. Rather than having to comb through spreadsheets and fumble through disparate tools to find financial and billing information, companies need a system that gives all employees access to the same information and data in a single place.
If there's not a common, shared view across all teams, precise cash forecasting will be impossible. Discussions around the boardroom table risk descending into a debate about whose information is correct, rather than agreeing on what decisions the business needs to take.
Only when all of this accurate information is brought together can enterprises produce a truly precise cash flow forecast. Having a complete view of anticipated revenues, costs and incomes enables them to really understand their margin and to accurately predict cash flow for any given time. With these insights, organizations can make better near- and long-term decisions and avoid expenditures that could threaten their business.
Ideally, organizations should be able to extend this transparency to the customer with portals that offer users access to all the same information — such as payment history and invoice details. As a result, customers will be able to view their own transactions and resolve their own inquiries, minimizing the likelihood of delayed payments, and improving customer satisfaction as well.
AI can help, but it has to be pragmatic
As with many other areas of business, artificial intelligence offers significant potential in helping solve these problems, but it needs to be practical and target common, current business problems rather than aspirational or flashy use cases. It needs to be pragmatic in application, gathering, processing and presenting data to produce measurable outcomes and a tangible return on investment.
Here's an example of how AI can support cash flow management: A services company relies on its clients to pay their bills on time to maintain steady cash flow and manage its operations. Using AI, the company is able to analyze past payment patterns, client behavior, economic indicators and other relevant data to accurately predict the propensity for any customer to pay a particular invoice.
For instance, the AI might establish that if a customer has been spoken to in the past week, that they are more likely to pay their bill on time. Or it may highlight that any invoice over $100,000 requires an extra layer of approval, which routinely causes delays.
The use of AI will enable enterprises to both generate more accurate cash flow forecasts for better business decisions and also to implement improvements in operating procedures and business practices that will improve the management of debt.
Cash is king, so manage it accordingly
The old saying still rings true today: Revenue is vanity, profit is sanity, cash is king. It doesn't matter if a business is booming or if it's struggling — bad cash flow management can sink any company. To stay on top of cash flow and guide themselves wisely, as a starting point organizations have to bring their accounting, operations, billing and sales workflows and data together in one place. In addition, smart use of AI allows enterprises to do more than just forecast correctly, enabling them to uncover new ways to boost cash flow entirely.
