Cloud-based treasury management systems provide a real-time and holistic view of finance
Chief financial officers (CFOs) face an increasingly volatile business environment reshaped by disruptive technologies and new global competitors. But tools and techniques are emerging that can help them stay competitive by managing liquidity more effectively. With support from their treasury teams, these new technologies can help CFOs free up significant extra cash to enhance growth opportunities.
CFO’s new role in treasury
To help deploy financial resources effectively, CFOs need an unencumbered view of the company’s monetary assets. New, cloud-based treasury management systems (TMS) enable them to see through legal entities, bank account structures and geographical barriers to get a real-time view of the financial position.
This technology gives them a clearer sight of future liquidity, enabling them to contribute more effectively to business decisions such as transformative investments or renegotiating vendor terms. It can also help them fund growth opportunities by condensing the cash-flow cycle to release more cash and minimise borrowing, and by optimising internal cash generation. The technology can also provide a holistic view of the company’s risk exposure.
Accelerating cash conversion
CFOs can use new technologies to view the whole financial supply chain and enable transactions such as reverse factoring. This is where a bank or finance company intermediates between the company and its supplier. It commits to pay the company’s invoices at an accelerated rate to benefit from early-payment discounts, charging the buyer a reduced interest rate.
It creates a triple win as the original company can preserve its working capital by extending days payable outstanding (DPO), but not have to pay early. The finance company earns a fee, and the supplier maximises its working capital by being paid faster.
A TMS can enable such strategies by connecting buyers and sellers of receivables directly, and facilitating the application and exchange of early payments or calculations of dynamic discounting.
Such strategies release significant free cash flow, which CFOs can use to help generate growth or profit.
The 2017 Hackett-REL Working Capital Management study revealed a growing gap between organisations that excel in automating and optimising working capital management, compared with those doing an average job.
By using more best practices and automation, top-quartile finance teams have 39 per cent lower days sales outstanding (DSO) than the median, and they generate $48 million of incremental cash flow per $1 billion of sales. Top-quartile companies also extend DPO by 65 per cent to yield an additional $187 million in cash flow per $1 billion in sales compared with median performers.
Streamlining liquidity management
Many large companies have hundreds of bank accounts around the world. Typically, each bank requires treasury to log in through a different portal or interface. This makes building the cash position slow and disjointed, and denies the CFO real-time access to the company’s liquidity status.
Cloud-based TMS streamlines this process by connecting to multiple banks automatically and delivering the CFO daily or real-time cash information. This holistic view helps them use funds most efficiently, invest excess cash to maximise return, free up cash to pay down debt, and fund operations
Minimising external debt sources is especially important in the current environment of rising interest rates.
Enhancing forecast accuracy TMS integrates easily with enterprise resource planning (ERP) systems. This, combined with full visibility of cash and liquidity, enables faster and more accurate cash-forecasting. These systems replace traditional methods of collecting projections through various emailed spreadsheets, as users access them directly via a browser.
Also, TMS links directly to the ERP’s accounts payable and accounts receivable functions enabling users to see upcoming inflows and outflows, and helping management allocate resources more effectively.
Hackett’s 2018 benchmarking data identified world-class finance organisations, defined by output measures such as cost as a percentage of revenue and cycle time. It found that these world-class companies are six times more likely to produce accurate one-month cash forecasts than their peers. This is, in large part, because they have more automatic processes.
The accuracy of forecasts is set to keep increasing as new technologies emerge, including artificial intelligence and cognitive computing, which can sift massive amounts of data, detect patterns and run predictive models. These will enable CFOs to have richer conversations with other executives about how to accelerate growth.
The Hackett Group’s 2018 Key Issues study discovered that broad-based adoption of advanced analytics is expected to rise by more than eight times in the next two to three years. This reflects the availability of big data and dedicated modelling solutions that integrate easily with on-premises and cloud platforms.
Wider view of risk
CFOs typically rely on their treasury team’s risk management skills to construct a risk management framework and execute it, from identification to measurement and mitigation.
But CFOs need to look beyond traditional financial risks. For example, larger organisations with more mature risk management programmes consider geo-political and compliance risks as financial risks.
CFOs are therefore working more closely than ever with their global treasury teams, which have the tools to collect risk information across functional silos via cloud solutions, and to centralise the risk data collection and management process.
With the help of TMS, treasury teams can provide the CFO with a more holistic view of risk through enhanced integration with bank systems and operational applications.
Meeting wider goals
CFOs are no longer simply financial custodians, they contribute to all major strategic decisions, including how to cut costs, and select and fund growth opportunities, while also managing risk.
To deliver on this expanded mandate, CFOs must shorten the cash conversion cycle by using technologies and supply chain financing techniques to decrease DSO and extend DPO. They must gain complete, real-time visibility into global cash with a single, automated solution that delivers timely, accurate updates.
CFOs must use complete cash visibility to optimise liquidity management, reduce external borrowing, maximise investment returns and sharpen forecasting.
Finally, they must create a holistic view of risk to protect the company in achieving its goals sustainably.
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