Why Better Cash Visibility Is Critical For Working Capital Investment Optimization

How better cash flow visibility strengthens critical liquidity reporting

Ensuring you don’t overinvest in inventory and other working capital is a constant challenge as a treasurer. But as the world emerges from the pandemic and businesses begin investing capital to recover the ground they lost when demand first dropped, it’s more important than ever to get it right.

The best illustration of the risks the pandemic poses to companies’ recovery efforts is what companies experienced while recovering from the SARS pandemic in 2004.

Just like 2020’s pandemic, there was an initial revenue shock that caused businesses to scale back inventory to match a decrease in demand. But when businesses reinvested in materials in anticipation of an increase in demand, there was a lag before they could convert it back to cash again. As a result, many businesses found themselves in a liquidity crisis.

The good news is, businesses today have an asset that most businesses in 2004 did not: data.

Big data wasn’t introduced as a concept until 2005. But today, it’s practically table stakes. And as PwC notes in its Working Capital Study 20/21, the best way to optimize working capital investment for recovery while avoiding a cash pinch during recovery is to ensure you have “real-time, bottom-up” visibility into your cash flow data.

In practical terms, this kind of cash flow visibility means you have access to “insights on demand.” For example, when you have cash flow questions (or are asked them by your CFO), it means you could open your cash flow reports, drill down through the data to find the answers in minutes, and trust those answers with total confidence.

Below, we’ve outlined how real-time cash flow visibility helps companies streamline critical capital investment activities even in the face of risk, as well as how your business can achieve it while also reducing the work required to build your reports.

How Real-Time Cash Visibility Supports Sustainable Working Capital Investment

When companies achieve true, real-time cash visibility, they’re better suited to make the most of the capital they have, no matter the risks they face. Below are three specific working capital tasks that better cash flow visibility can help streamline post-pandemic or in the event of any future disruptions.

1. Real-Time Cash Flow Visibility Makes Capital Planning More Agile and Profitable

Adjusting capital allocations to align with changing market conditions is extremely difficult for most companies because it’s hard to determine which investments are the right ones to make at any given time. It’s even more so when trying to balance the capital needs of various stakeholders within the company!

When you have real-time cash flow visibility, however, building an agile capital planning process that aligns your business is much easier — and more profitable.

For example, Mckinsey’s 20-year study of 1,500 U.S. companies found companies that successfully used hard data to reallocate capital on a continuous basis (rather than on a cyclical one) saw a 4% average increase in shareholder returns each year. Practically speaking, that means improving cash flow visibility could help you capture revenue from your capital investments that you might be missing out on at the moment.

Furthermore, when you have access to accurate data in real time, it helps align capital priorities across your business. Since decisions are made on data, not hunches, it eliminates the opportunity for biases that may cloud decision-making when the pressure to make a decision is high.

2. Real-Time Cash Flow Visibility Helps Minimize Reliance on External Funding

External funding is expensive — even more so when you have to accept a suboptimal interest rate to bail the business out after overinvesting. However, you can avoid this scenario altogether if you have the cash flow visibility you need to plan out capital investments in a predictable fashion in real time.

Better cash flow visibility will also help you use the working capital you do have to pay down any existing debt you may have already taken on. For instance, the ability to understand your cash burn rate at a transactional level in real time helps you see opportunities to optimize cash levels in order to free up cash for paying off loans ahead of time.

3. Real-Time Cash Visibility Helps Hedge Foreign Exchange Proactively in Volatile Markets

For multinational companies, pulling cash out of a foreign business unit at the wrong time can be a costly mistake. So when the foreign exchange (FX) market is extremely volatile (like it is right now in response to COVID-19), many companies hedge more conservatively to ensure they’re covered.

However, with greater cash flow visibility, companies could know for sure if they will be, which would help them capitalize on a favorable exchange rate or a profitable investment they might otherwise miss if they hedge conservatively.

For example, if your organization has a real-time understanding of the company capital investment potential across the business, you’ll be better equipped to make strategic decisions about when to move money and how much to move to in order to strike the right balance between FX, capital investment, and liquidity risk.

Why Most Companies Struggle To Achieve Real-Time Cash Visibility

Many companies today still manage their cash reporting manually in spreadsheets. And although spreadsheets are a valuable tool for any treasurer, the manual nature of spreadsheets reduces a treasurer’s ability to learn from their cash flow data in real time. As a result, the value of anything they might learn from their cash flow data is severely diminished.

For example, most companies spend hundreds of hours each year collecting and transforming the data required to build the reports they need in a spreadsheet. But even when that report is built, treasurers still have to dig through the data manually (or seek out stakeholders) for the insights they need to make informed capital investment decisions, which is equally time-consuming.

As Accenture explains in a recent article, the key to “understanding [market] complexity, anticipating potential disruption, and quickly developing a response” lies in a business’s ability to develop “strong data and analytics capabilities.”

That’s why we built CashAnalytics the way we did — to provide businesses with the cash flow data and analytics capabilities they need to draw real-time insights that empower informed working capital investments. Learn more about CashAnalytics’ platform here.