Cash & Liquidity Management

Re-engineering cash flows

Published: Sep 2014
Super streamlined train in Milan central station

The next time one of your treasury peers tells you that managing cash flows are not a significant challenge for his or her company, there is a good chance they are either bending the truth or simply disconnected from reality.

According to research published by American Express Global Corporate Payments, 95% of businesses say cash flow continues to be a major priority in 2014. The same study found that 93% of businesses were experiencing delays in getting paid by their customers. Now, that’s no minor issue.

That most corporates face an uphill battle in managing their cash flows is not news in itself. The interesting question is why do companies experience these difficulties – especially in the age of technology and automation? What is more, how can companies ‘re-engineer’ their cash flows and transform their working capital position without starting completely from scratch, or interrupting day-to-day business?

Lifeblood of the company

The importance of cash flows to the long-term success of a company is clear. “Working capital management is a strategic topic for treasurers and is key to the success of a business because astute investors always analyse the cash flow generating capability of a company,” says Joerg Wiemer, CEO at Treasury Intelligence Solutions (TIS). “Cash flow is a value driver. Generally the better the cash flow, the higher the company value and the share price will be. The credit ratings agencies place a clear emphasis on companies’ ability to create cash flow, so there are huge benefits to speeding up the process,” he says.

An analogy Wiemer uses is to look at cash flows as the lifeblood of a company. “Just as doctors measure the pulse and blood pressure of their patients as signs of life, so too should a company’s cash flows give key signs as to the financial wellbeing of a company,” he says. “Excess cash sitting in local subsidiary accounts is destroying shareholder value because this cash is not earning interest, or being used at headquarters to grow the business. Improving visibility over cash flows and balances is crucial to addressing this,” he adds.

There are essentially three areas which combine to influence a company’s working capital situation: How quickly it collects from customers, how quickly it is paying its suppliers, and what size its inventory is at any given time.

So far, so simple. But if it all comes down primarily to these three factors, why can it be such a headache for corporates? One reason is that payments from customers can be difficult to keep tabs on, especially in large companies with a widely spread customer base.

Cash flow problems

“The incoming side of cash flow is the crux as corporates often don’t know exactly where, when, and how much cash actually comes in,” says Tobias Schaad, Treasury Consultant at treasury advisory specialists Zanders. “And once the cash reaches the organisation, depending on the structure, it can be very decentralised.”

James Waud, Head of Subsidiary Clients and Sales Performance, Global Transaction Services at RBS, concurs that large corporates with internationally dispersed operations are particularly prone to cash flow issues. “As companies expand into new markets, this can create currency risk, as well as a host of potential issues with trapped cash, cross-border transfers, tax and regulation, among others, all of which make cash more difficult to manage,” he explains.

He goes on to say that acquisitions can also impact a company’s cash flow. “This adds to the number of banks and bank accounts, which need to be integrated into the relevant ERP, TMS and banking platforms. Acquisition can also dig deeply into balance sheet cash which, in turn increases the need to determine where cash flow efficiencies exist internally, as opposed to resorting to external funding sources, particularly when you consider the yield advantage of ‘self-funding’.”

Beyond these factors, corporate culture can exacerbate cash flow problems. This is particularly the case when company policy prioritises achieving revenues over how and when cash flows come in. “Salespeople often have the wrong incentives (from a cash flow perspective),” says TIS’s Wiemer. “Their compensation is linked to recurring revenues, but not to cash flows.” While revenues are obviously a key indicator of financial health, cash flowing into the company should not be overlooked. For this reason Wiemer recommends that at least part of salesforce compensation should be linked to when the proceeds from a sale actually hit the company’s account. However, it is also important to bear in mind that cash flow alone does not present a complete picture of profitability.


So what else are corporates who are experiencing cash flow issues to do? A good place to start is by looking at the three components that have the largest impact on cash flow. Indicators such as days’ sales outstanding (a measure of the average number of days that a company takes to collect revenues after a sale has been made), days’ payable outstanding (a company’s average payable period), and days’ sales of inventory (a measure of how long it takes to turn inventory into revenues) should be analysed over time and compared with peers. Often the ‘collect fast, pay slow’ maxim can make a big difference if made a part of a company’s culture.

Many corporates find the payables side easier to influence. “In our business the focus on working capital is more likely to be on the payables side rather than receivables side, namely in delaying cash flows,” one head of cash management at a MNC in the technology sector tells Treasury Today. “We expect it to be easier to be able to negotiate better payment terms with our suppliers.”

Buyer-initiated payment solutions and expense management tools can both help corporates actively dictate the speed at which suppliers are paid, the latter with the added advantage of cutting overhead. This initial analysis can also sometimes show that cash flow issues are arising because working capital is simply blocked in inventory.

Seeking outside help

However, where do you go when there are no more cash flow gains to be squeezed out internally? A logical second step might be to seek assistance for your bank or banks. And indeed in many cases this can do the trick. A bank (or banks) lengthening its credit lines to a corporate to act as a buffer against the vagaries of late-paying customers can be of great help, for example. However, banks have become much less willing (some would say able) to extend the support they already have in place for corporate customers.

“A number of corporates we have spoken to, especially in manufacturing industries, that have traditionally relied on a line of unsecured credit from their banks over time, are now struggling to obtain additional bank credit,” says Alan Gillies, Vice President of Sales at American Express Global Corporate Payments.

This is forcing them to seek alternative sources of cash flow. Beyond extending bank credit, there are a number of ‘traditional’ methods available to corporates to ease the strain of restricted cash flow on their business. These include supply chain finance, invoice discounting, and credit insurance.

These can indeed take on some of a company’s cash flow risk, although each solution has its drawbacks.

Take invoice discounting, by which money is drawn against revenues before cash is received, for example. While it can be an effective solution for some companies, it can also lock those who use it into an awkward situation. “Invoice discounting can be like a drug for a company,” warns TIS’s Wiemer. “It may well bring significant benefits in terms of working capital optimisation in the first year, but to maintain this higher level a company has to keep using the technique. Once you stop using it, your working capital will suffer. Plus it comes at a cost.” He says a better way is to analyse cash flows in a more sustainable way and devote more time and effort to negotiating better payment terms with customers and suppliers.

He is equally wary of resorting to using credit insurance before considering alternatives. “If you manage a business you should know your customers and their credit profiles. If you are a strategic supplier to them, why should you buy credit insurance? Even in a difficult economic environment, the case for credit insurance is weak, although that depends on how it is priced.”


Other than the ‘traditional’ methods, there are also more innovative solutions to help re-engineer a company’s cash flows. Card providers, for example, offer corporate cards that allow companies to insert a fixed number of days’ cash flow benefit between them and their suppliers. “This kind of solution is becoming popular as working capital performance is on almost every finance director’s scorecard,” says American Express’s Gillies.

In-house banks can also revolutionise a company’s cash flows, by allowing corporates to make payments in-house, which is cheaper and faster than using external banking infrastructure. They can also help reduce operating costs and banking fees. Wiemer says in-house banks can play a crucial role in addressing cash flow issues. “The time that cash spends stuck in the banking system is painful for corporates as it isn’t earning interest.”

However, he adds that this solution should not be the first port of call for a company looking to improve its cash flows. “In-house banks are more of a fine-tuning measure – a second step to be taken only after a corporate has streamlined its payment processes and increased the visibility and control over its cash flows,” he says.

Payments factories, whereby payments processes are centralised, are also becoming increasingly popular with corporates. Enhanced by virtual accounts, these structures can help with a company’s cash turnover from the outset. Furthermore, the growth of payments factories is being driven partly by connectivity to the SWIFT financial messaging system and the implementation of the Single Euro Payments Area (SEPA). One drawback of the setup is that it can be complex and time-consuming to implement, however.

So it seems there are solutions – albeit somewhat cumbersome in some instances – to help corporates deal with their cash flow problems. But what is the role of the treasurer in all this?

The treasurer and cash flows

Whatever the solution, the treasurer should be at the heart of the discussion when a company looks to improve its cash flows.

“The role of the treasurer in optimising cash flows is absolutely critical,” says RBS’s Waud. “They have the ability to leverage a company’s internal cash flows in an optimal way that leads to a reduced reliance on external sources, in particular the capital markets and bank debt.”

Waud adds that the treasury department can use its contacts in the banking world to gain expertise. “In managing bank relationships, treasurers have a very powerful ability to call on the considerable cash management advisory services of their relationship banking providers to demonstrate where they see best practice solutions. It is vital to demonstrate that they are running a world-class treasury function and are benchmarking that, constantly reviewing efficiencies against the marketplace,” he says.

Gillies agrees that the treasurer has an important role, but adds that collaboration with other departments is also crucial. “We are increasingly seeing that treasury, finance and procurement are coming together to decide how to influence goals from a working capital perspective,” he says.

Moreover, technology can help in the battle to improve cash flows. “In the future there could be a huge trend to leverage cloud-based technology in re-engineering cash flows. Some of the tools available are easy to use and can generate transparency and solve cash flow problems. It has the potential to be a real disruptive innovation in the working capital space,” says TIS’s Wiemer.

“Nowadays there are big data analysis tools that can improve your ability to forecast when you are going to receive cash,” says Zanders’ Schaad. “Having access to better forecasting is an important step in streamlining cash flows.”

Cash forecasting: a checklist

The best way to improve cash forecasting, according to Treasury Alliance Group, is to evaluate the current process against five best practices of cash forecasting.

  1. Simplicity A cash forecast requires two pieces of accurate information: the amount of cash on hand and the amount to be received net of expenses. Add the dimensions of time and currency; when will the cash be received, and in what currency and you have a reasonable and very effective cash forecast. When asking business units to forecast cash, keep it simple. Don’t ask for a detailed weekly flow of funds report requiring forecasts of inter-company receipts/payments, loans/investments and third-party receipts/payments.
  2. CooperationGood quality forecasting input is the primary determinant of a good quality forecast. And the quality of the input is in the hands of your business partners. Building trust is an important step in this process. If forecasting accuracy is used as a punitive tool by treasury, units will hedge forecasts and refrain from sharing key strategic insights, diluting their value.
  3. CommunicationForecasting in a global company adds the challenge of multiple currencies, language and culture. It is critical that all business units adopt common definitions in the cash forecasting process. Cash in bank ledgers and available cash are two different concepts, familiar to treasury associates but less familiar to accountants or others involved, so make sure everyone completing the forecasts understands and uses the same definitions.
  4. Structure Cash forecasting problems arise when business units lose faith in central treasury’s ability to respond to their urgent funding needs in a timely manner. They respond with excessive caution in forecasting receipts and even hold onto their own cash reserves, diluting the accuracy and value of the forecast. The solution is to have an efficient account structure serviced by a reliable network of banks. This can take time to develop but results in reduced administration, transaction and other costs.
  5. Technology You can increase simplicity, cooperation and communication with the effective use of technology such as gathering forecast information through an intranet or file-sharing site. Using an intranet adds security and administrative efficiency as well. Work with your technology team to develop a form for collecting the forecast input. These are relatively simple to develop and the data gathered this way is typically stored in a database on one of your servers. This is a winning approach from a number of perspectives; it is consistent, enterprise-wide, secure and administratively efficient.

The best practices outlined above won’t get you perfection but will give you a good start.

All our content is free, just register below

As we move to a new and improved digital platform all users need to create a new account. This is very simple and should only take a moment.

Already have an account? Sign In

Already a member? Sign In

This website uses cookies and asks for your personal data to enhance your browsing experience. We are committed to protecting your privacy and ensuring your data is handled in compliance with the General Data Protection Regulation (GDPR).