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The importance of cash for businesses during periods of economic uncertainty

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Producers, manufacturers and procurement leaders across the globe are trying to come to terms with the impact that Covid-19 is having on their business. Unexpected hurdles such as sudden plant lockdowns and disrupted production lines put immense pressure to find a source of working capital. Boards are taking increasingly drastic measures, such as pay cuts and government-backed loans for SME businesses, to ensure positive cash flow and to get through this pandemic without going bust. However, as surprising as it may sound, every business is sitting on cash. Whether the financial department is aware of it or not, there are solutions that can unlock cash. 

The following tips offer help to businesses right now, to mitigate the financial impact of the crisis and power through the economic volatility.

Cash is at the heart of any business

Cash will always remain vital for the financial health of any organisations. However, it is easy to become complacent about the sustainability of cash flowing through the business when the economy is thriving. In the short term, even companies with seemingly future-proof strategies are at risk of filing for insolvency if they run out of cash and working capital. . During a crisis like Covid-19, CFOs must immediately shift their attention to cash management, as it will have far-reaching implications not only on financial processes, but also on business continuity and customer relationships.

Prioritising cash collection

When experiencing issues with cash flow, leadership might take steps to revive it by looking for external sources or emergency loan package offered by the government in the first instance. However, organisations should refrain from continually borrowing money, as it fixes the problem only temporarily and puts businesses at risk of going into greater debt. Furthermore, as many companies might face problems when trying to participate in the loan scheme, there is a growing demand for more efficient methods of obtaining cash. One way is making sure that money which is owed to the business is paid on time. Unlike external loans, releasing cash from companies’ debtors is not only interest-free but also available immediately.

There’s no need for the C-suite to look externally for financing as there is often a large, hidden source of capital that exists in their own balance sheets. Generating cash from company’s own sources could be achieved by getting paid quicker and on time by its debtors.

Gaining control over cash collection and ensuring that other entities that owe money are paying on time is not only key to improve results and increase efficiency for emerging out of this current crisis, but will give CFOs a clearer picture of the flowing cash.

Automating the process

Many companies still stick to slow, paper-based financial processing and are unable to access customer information quickly. Traditionally cash collection processes were considered a strenuous task that requires time and a lot of manual effort, especially when working with a large number of suppliers. In light of Covid-19, when key decisions need to be made quickly, this approach can cause problems.

Innovating financial functions might prove to be a much-needed lifeline during current uncertainty. Automating cash collection could eliminate outdated practices of manually managing cash and credit, reduce bad debt provision, and provide insights for better decision making.

Furthermore, applying intelligent automation to account receivables significantly reduces dependency on manual work. In other words, staff no longer needs to spend valuable time processing payments on a paper spreadsheet and instead, can devote this time to building customer relationships and influencing being paid quicker. By implementing AI, businesses could quickly unlock working capital and redeploy staff to more strategic work.

In times of uncertainty, automating your accounts receivable allows valuable resources to focus on these value-add activities, resulting in accurate and timely debtor information and cash allocation. Indeed, having up-to-date and efficient visibility of the cash flow is vital at the moment. In many cases ‘analogue’ processing and data overload sitting in silos can be overwhelming for financial leaders, and cause inaccurate forecasting and ineffective decision making.

Needless to say, these miscalculations might have a far-reaching impact on the business’ daily operations, staff, and relationships with suppliers. AI-powered automation and analytics can also provide transparency into customer behaviour, including current cash position, sales trends and payment patterns. This gives financial leaders the full picture of balance sheets and helps in proactively mitigating risk, outlining critical data to improve decision making, as well as staying on track in a time of crisis.

In addition, transforming cash collection offers more benefits than increasing capital and reducing the burden on staff. Automated processing saves a significant amount of time, as all the payments are allocated in much-reduced processing time and there is no need to chase down debtors who have already paid up.  Furthermore, matching customer payments to invoices more quickly allows to improve customer service and relationships with business partners.

The cost of doing nothing

In light of Covid-19, there are critical decisions that businesses must face every day. Such an overwhelming responsibility might lead to decision paralysis and remaining still. Unfortunately, as businesses shy away from taking decisive steps now, the risks will continue to build up – leaders should focus on looking beyond the immediate crisis and develop systems that can adapt quickly as circumstances change.

Gartner’s ‘How CFOs Translate Growth Into Sustained Profitability’ research around navigating recession post 2008 crash, found that companies that chose to stay “on course” and simply weather changes in economic cycles were worse off than businesses that developed comprehensive action plans to. The latter group were rewarded with sustained advantage over their competitors over the last eight years.

Future-proofed finances

Today’s crisis has financially affected almost every business and exposed many vulnerabilities within financial functions. Establishing a stable cashflow and unlocking cash needlessly held unallocated enables a business to manage through a downturn without the need for urgent reactive change. Business need to keep the flow of cash so that the payments from customers ensure the ability to meet its obligations to pay suppliers and their staff. Sticking to previously accepted solutions just because ‘it has worked well before’ is no longer a viable strategy. Prioritising cash and applying automation in the AR process can reduce costs, improve results and increase efficiency for emerging out of this current crisis. Most importantly of all, it provides a sustainable lifeline of working capital.

Brian Morgan, Business Growth and Partner Director – CFO Advisory, Rimilia (opens in new tab)

Brian Morgan, Business Growth and Partner Director – CFO Advisory, Rimilia.