“Cash flow, not revenue, sustains corporate success.” So said Lou Gerstner reflecting on his turnaround of IBM in the 1990s. Brought in to stop IBM from going bust, cash management was critical to the turnaround of IBM. Gerstner divested and sold off the business lines that weren’t working and strengthened IBM’s investment in its services arm.
Getting rid of non-functioning business units and ensuring effective credit control are well known strategies for reducing cash risk. But sustaining success is both combatting risk of no cash and planning how to invest cash to put yourself in a position to grow. Translated simply, Gerstner’s words could read as “always having cash in the bank means you can think about growth without having to worry about risk.”
Why Is Cash So Difficult to Manage?
In many ways, Gerstner’s lesson is something everybody knows. As consumers we try not to overspend on our credit cards. A monthly salary paid in 2 weeks’ time can’t pay a debt due today. The cash to pay your credit card bill needs to be in the bank the day your bill is due.
For businesses paying multiple suppliers and receiving income from multiple customers, knowing exactly when receivables are coming in means worrying far less about the liabilities and the ability to focus far more on where the business wants to grow. Cash in the bank today means less risk and more opportunity.
Almost all management teams know this but few businesses find it easy to achieve in practice. In the UK, 80% of businesses that go bust fail due to poor management of their cash flow. It’s not hard to see why. Unlike individuals earning a salary, businesses work with high volumes of customers. Many customers pay late but suppliers need to be paid on time. As volumes increase translating your sales into known payment dates to cover your liabilities gets more and more challenging.
At the same time, no business can grow without regular investment into its people, systems and services. This means additional outflows that need to be financed by even more customers, external financing or cash savings over time. Each strategy has its own risk. The safest one is cash flows from operations. But achieving that is no easy feat. For any business above a certain size, it’s a lot of transactions in and out of their bank with payment dates that don’t naturally align and creditors and employees who want to be paid today.
How Do You Make it Easier to Manage Your Cash?
The first step to managing cash effectively is clear processes. Whatever your business does, both income and expenses need to be managed through clear processes. The second step is then keeping the data that emerges from those processes clean. This is where the value of a tool like Odoo comes in.
Odoo’s CRM & Sales modules can ensure sales data is effectively monitored and managed while Odoo’s Accounting module can ensure all invoices going through the business are managed in a centralised location. OCR can quickly extract key data points for invoices that need to be paid while automation enables simple actions to improve credit control.
With bank integrations, this data can be viewed alongside the current cash position while the records build up to form a historical picture of cash performance by customer, supplier and business unit.
How Do You Turn Good Accounting into Effective Decision-Making?
Clear processes and clean data de-risk a business’s cash position by ensuring the current cash position can be seen alongside the upcoming sales and expenses as invoices. For simple businesses with consistent payment patterns amongst customers and suppliers a combination of this information and some extrapolation may suffice.
But businesses above a certain size, structured in a certain way or growing quickly need to be able to look forward with confidence and plan into the future. This is the value of a tool like Agicap.
Via a native API with Odoo, Agicap can automatically bring in the AR and AP ledgers from Odoo to provide a short-term cash forecast that turns your ledgers into visual displays of your current and upcoming cash position by bank account and by time.
Via Agicap’s AI recommendations, customers can achieve a greater depth of analysis on their income and spending through automated categorisation and improved accuracy of payment dates instead of relying on invoice dates.
Agicap’s short-term cash visibility can then be complemented with a long-term business plan or with other cash items that sit outside the ERP.
Once connected and the forecast tailored to reflect your business, Agicap’s scenario planning allows for side by side “what if” analysis for growth or risk. Direct bank connections then allow you to track the performance of the forecast and adjust strategies as circumstances evolve and reflect in the data coming directly from your banks.
When Might Agicap Add Value for You?
Clearly, knowing your cash position and forecasting cash flow are important for all businesses. But there are certain circumstances where the value of a tool like Agicap increases significantly.
- Fast Growth
Businesses making regular cash investments into their business can use Agicap’s cash flow planning to manage their timelines and stress test different scenarios and Agicap’s banking connectivity to prevent themselves going into overdraft where timelines do get tight.
- Operational Complexity
Businesses with long working capital cycles can use Agicap to plan their operational investments, align their purchasing strategy to their sales forecast and ensure historical actuals from their banks inform their forecast accurately as they go.
- Organisational Complexity
Businesses operating across multiple sites, entities, currencies and / or teams can centralise their different data feeds into Agicap to produce cash flow forecasts and cash pools broken down by site, entity or currency as they wish.