Cash flow forecasting is a critical practice for businesses of all sizes. By understanding cash positions up to 13 weeks down the line or ensuring cash flows are in line with budgetary goals, forecasting can keep a business on track and alert finance professionals to act when an issue arises.
But there are plenty of factors behind why firms, especially small and medium-sized businesses (SMBs), either don’t regularly engage in forecasting practices or fail to derive the most value out of the forecasting that does occur.
It’s an understandable challenge, according to BC Krishna, founder and CEO of Centime.
“There are challenges to doing it systematically and consistently and to make sure that there is discipline within the organization to consider it a routine process,” Krishna recently told PYMNTS.
Cobbling together data from a variety of sources in a variety of formats remains one of the biggest hurdles to proper cash flow forecasting. Yet when organizations are able to wield technology that supports their forecasting goals, firms can begin to recognize that this practice has a much deeper, meaningful relationship with other key functions of the financial back office — namely, accounts receivable (AR) and accounts payable (AP) — than businesses might first presume.
Strengthening Accounts Receivable
Cash forecasting naturally needs access to key financial data sources like bank accounts, accounting systems and general ledgers. But what’s important to note, said Krishna, is that cash flow forecasting itself will not inherently lead to healthier cash flow.
“Cash forecasting is a means to an end — it’s not an end unto itself,” he said. “You still need the levers to be able to manage your cash so that you can get the goals that you set out for your own business.”
One of those levers, he noted, is accounts receivable. Having visibility into the payments that will be flowing into the enterprise is, of course, a critical component of overall cash predictability. But there is a particular feature of AR workflows that can have an especially significant impact on cash forecasting and, without the right tools in place, can thwart forecasting goals: late B2B payments.
“People are paying late because they realize that they can pay late and that they can get away with it and that it helps them with their own cash flow,” Krishna noted, adding that, sometimes, payment delays are the result of sloppy accounts payable practices whereas, other times, it’s a deliberate cash flow strategy.
Understanding which invoices will be late and by how much can lead to uncovering and anticipating cash flow gaps. But when forecasting technology is able to take that data into consideration, an organization can be far more prepared to fill those gaps.
For users of Centime, that may come in the form of automated reminders to business customers to pay or accessing credit via a commercial card solution.
Strategizing Accounts Payables
That integrated card capability is set for expansion as a result of Centime’s recent participation in Visa’s Fast Track Program. While Krishna remained mum on the exact plan for that collaboration, he did acknowledge that the effort is part of Centime’s acknowledgment of accounts payable’s — and, more specifically, commercial card payments in AP’s — relationship to cash flow forecasting.
The corporate card is an especially valuable tool as it gains adoption and more suppliers embrace acceptance. Yet Krishna also noted that the recent strategy of card providers to drive up use — focusing on the rewards and cash back programs to benefit buyers — may not be the right message.
“There is a fundamental shift that I think we need to take as an industry when it comes to how cards are perceived, particularly commercial,” he said, adding, “I will posit that the real priority should be on working capital benefits that a card provides.”
The value of having extra capital float in the form of a line of credit can be immense and a benefit that other popular B2B payment methods like ACH fail to offer. Yet today, Krishna noted, the cards’ benefits are almost squarely focused on the buyer whereas all the costs fall to the supplier.
It’s a paradigm that needs to change, he said.
“We need to challenge the way in which those costs are actually assigned and recalibrate a little bit,” Krishna said.
As Centime focuses on its card strategy, Krishna also emphasized that the company is not a fully accounts payable or accounts receivable solution. Rather, the firm acknowledges the intrinsic relationship that AP and AR have on cash flow forecasting, and it’s a relationship that can go both ways: Cash forecasting can identify issues with incoming payments or supplier payments, while AP and AR flows can have a significant impact on cash forecasting analysis.
As organizations focus their digitization efforts on modernizing the financial back office, data integration and the complex, interweaving relationships from one financial function to the next will be essential to obtain the clearest view of financial health.