Technology-Driven Solutions for Working Capital Management

Every day, strategic decisions must be made to monitor, assess, protect, and optimize your business’ cash flow. 

However, the burden of fragmented data and outdated, cumbersome processes can hinder your ability to manage your business’ working capital effectively. 

With rising interest rates, high market volatility, and economic uncertainty top of mind for many, it is now essential to implement actions to protect balance sheets, anticipate cash needs, and streamline operations to achieve greater control and visibility.

Working capital management is a pressing matter. Business leaders and finance teams should leverage available accounting and finance technological power to maximize efficiency and enhance operations.

The importance of working capital management

Working capital is a trustworthy key performance indicator (KPI) to which chief financial officers (CFOs) should pay attention. This ratio, which is your current assets/current liabilities, is a faithful witness to your company's short-term financial health.

By considering short-term assets and liabilities, you can determine your net working capital to assess the money readily available to meet your current expenses. It gives you a critical insight into your finances, money cycle, and assets to make the right decision and upgrade your overall strategy. 

Why is working capital management critical at the moment?

In the current economic climate, managing your working capital with an iron fist is essential to operate effectively and stay competitive. After all, cash flow is the ultimate value driver, and the risk of overlooking effective working capital management is a tough one to pay. 

Especially in an economic downturn, with increasing insolvencies and rising interest rates, liquidities must be flowing and accessible in anticipation of unexpected expenses and needs. Unsurprisingly, CFOs are trying to factor their receivables or sell their accounts receivable to optimize their cash flow. 

According to Johannes Wehrmann, managing director for corporate sales at Demica, a supply chain finance platform provider, more companies are now looking for working capital financing facilities.

Managing cash more efficiently and paying off higher debt by selling receivables is the best move - and effective working capital management is the best ally to implement this strategy. 

How technology optimizes working capital management

Now more than ever, business leaders should foster resilience and agility within their organizations to help mitigate current or future potential risks. 

Keeping track of your finances, managing your order-to-cash cycle, reducing days sales outstanding (DSO), and knowing where your money is, is essential but time-consuming.

Leveraging technology to smoothen these processes is a game-changer. 

With the right software, you can automate accounting operations, provide financial analysis and decision-making tools, and improve communication and collaboration. It can save you precious time and money by reducing the need for manual data entry while improving accuracy. It also makes financial forecasting and budgeting easier and tackles the burden of fragmented data to make sure everyone is on the same page regarding financial matters.

The following are some gains from using technology to augment your working capital management.

• Aggregating data: For several businesses, financial data is scattered across multiple platforms, including spreadsheets, manual or digital documents, e-mail correspondence, and accounting or ERP platforms. 
  The introduction of new technological solutions brings all of this data onto one single platform, providing you and your team with a clear line of sight into the financial health of your business. 
  This enables improved working capital management across the board for your organization. 
• Promoting analytics and automation: Technology allows you and your teams to automate manual tasks and garner more accurate and up-to-date working capital management data and insights for your business.

What types of KPIs should CFOs monitor?

Companies that leverage technology and data to manage their working capital can add back to their bottom lines. According to McKinsey, focus should be placed on three key areas to improve your working capital management. 

• Building centralized data infrastructure: This is essential to prevent revenue leaks caused by disconnected, fragmented, and inaccurate data (whether it is obsolete customer information, incorrect invoices, or messy spreadsheets). 
  By centralizing data and relying on appropriate software, you can easily solve the problem of cash haemorrhage. 
• Monitoring the right KPIs while implementing solutions to manage working capital: If you want to assess the efficiency of your working capital management strategy, you should closely monitor the relevant KPIs to access insightful information. 
  Accurate forecasting via KPIs enables data-driven decisions to anticipate threats to your cash flow, like inventory shortages and overselling.
• Implementing forward-looking reporting: Relying on manual vendor management and payment processes across supply chains and beyond can only hinder your competitiveness and your operations' efficiency. 
  Automating accounts payable and working capital solutions gives you more flexibility to pay your suppliers and be paid in return, consequently accelerating your cash flow. 

The image below details the essential KPIs that must be on a CFO's radar.

Source: McKinsey

Types of working capital management solutions

Optimizing working capital management comes hand in hand with keeping on top of your customers and managing your accounts receivables, as it is the primary source of cash bleeding. It involves the time-consuming task of segmenting your customer portfolio by identifying and prioritizing high-risk customers and serial (or not yet) late payers. 

Of course, you can ask your employees to perform this tedious task or take it upon yourself, as many business owners do. However, you also have the option to invest in advanced classification algorithms to seamlessly categorize your customers according to their risk to limit your exposure to the riskier profiles.

How?

By using working capital management software. The relevant customers will be contacted right after invoice emission to ensure you collect your fees quicker and keep your accounts receivables under control. 

The best working capital management solutions include software and services that help mitigate risk and optimize your company's cash flow. It leverages accounts payable and accounts receivable solutions, loan management, and invoicing management and optimization.

Accounts receivable automation software

Relying on ERP and CRM technology alone isn't sustainable. It only gathers more dispersed, disaggregated data to process. Besides, sticking to manual processes can negatively impact your team morale and costs by accumulating too many error-prone processes. With accounts receivable software, you can:

• Rely on automated collection solutions to contact customers. This incentivizes them to pay as soon as possible. The software generates reminder emails a few days before the due date to ensure customers remember your fees. 
• Prevent payment delays. Offer customers a one-step payment process accessible for all payment methods (Stripe, Direct Debit, ACH, or EE transfer). 
• Use a tailored strategy. Find out what works best for every customer. Some may respond to emails more than text messages, whereas others may respond better to the credit-control team's calls. 

Accounts payable automation software

Accounts payable automation software enables buying organizations to receive invoices, manage approvals, and process payments seamlessly. With this software, you can:

• Enable electronic invoicing. This supplants outdated paper-based methods that too often result in data loss or errors. Some solutions can even convert paper invoices to electronic using artificial intelligence to extract and store relevant data in cloud-based storage. 
• Allow easy reconciliation. Store relevant data or automatically redirect to the appropriate teams for review. This automated process saves teams considerable time, as reconciliation is a well-known cumbersome, even though crucial process. 
• Have archiving and data safety. Everything you need is easy to access for all your departments and ready to use for audit purposes. As a result, it strengthens coordination within your team and makes communication easier. 

4 benefits of working capital management software 

1. Automated processes 

Working capital management improves once the accounting function is automated. It is an optimal strategy to collect more cash and reduce your DSO while increasing your teams' productivity and focusing on added-value operations. 

2. Maximized efficiency

Accounts payable and receivable automation software can simplify invoice processing and follow-up. It helps reduce payment errors, and detects duplicate or fraudulent payments. Automated solutions are easy to integrate into your existing financial systems, so you don't have to worry about data flow and communication. 

3. Optimized cost and productivity 

Manual collection processes are lengthy and time-consuming in B2C or B2B contexts, which hurts productivity.

For B2B companies, the process is even more strenuous, especially in the absence of a dedicated credit controller team, as is the case for SMEs.

Automation removes such manual processes and gives back time to employees to focus on more value-add tasks.

Accounts payable automation can also cut the cost of invoice processing by reducing the amount of data entry involved in the process and eliminating document storage, postage, and invoice production costs. Accounts receivable automation has the same positive impact on your finances. 

4. Improved customers relationships 

Accounts payable automation can increase your business transparency as it integrates all compliance rules within the system. It helps mitigate risks and prevent fraud by immediately detecting duplicate invoices, additional charges, and fraudulent activity.

Automating your accounting function helps improve customer relationships through better communication. Paying is made easier for the customer, as well as being reminded to pay, and therefore, you can unlock your outstanding revenues while maintaining good relationships with your customers. 

Accounts receivable automated solutions segment your customers by sorting out loyal customers with a good history of payment behavior from late serial payers. It also uses a different tone of voice for each of them, whether a gentle nudge or a stricter approach.

Artificial intelligence can set up creative follow-up strategies by assessing the ideal frequency of payment reminders and relying on omnichannel communication. For instance, it can even tailor the message to its recipient according to age or mimic its style. 

The working capital challenge 

It is clear now that working capital management should be at the top of CFOs' agenda, yet it is far from the case.

In a recent Deloitte webcast, participants poorly evaluated their organization's ability to drive working capital performance, admitting they were "somewhat or very concerned."

Any business trying to fuel growth by freeing cash should address the working capital management challenge by harnessing the power of technology and automation. 

Understand the key components of accounting automation. See how technology can optimize your company’s finance management processes.