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Cash flow management should be at the heart of all business decision making and, while in some senses it is a relatively straightforward concept, it is nevertheless essential for the success (or otherwise) of businesses of all sizes.
In simple terms, the definition of cash flow is the balance between the money coming into a business from revenue sources, and the money that is paid out in payroll, stock, loan repayments, equipment, premises, taxes, etc.
Managing cash flow is essential to growth because businesses can’t cover costs and subsequently increase profits without keeping control over expenses. This can be achieved through a wide variety of means, such as limiting the costs associated with operating payroll, the customer payment terms on offer, the terms on which suppliers are paid, or how business loans are structured, for instance.
However, in a global business environment where enterprises commonly operate in different jurisdictions simultaneously, employ a mix of staff and independent contractors who are paid at different rates, and therefore have to manage payroll in multiple currencies, keeping a check on this key expense of payroll and managing cash flow can be significantly more challenging.
This is why analytics tools for cash flow management are such a valuable resource that enables enterprises of all sizes to better manage payroll and other expenditure.
Leveraging Analytics Tools for Cash Flow Management
Analytics tools enable finance departments to gain valuable insights that help them to better and more accurately manage all aspects of cash flow, including the costs associated with payroll.
One of the tools that is being increasingly used by companies that employ large numbers of employees and contractors is payroll analytics suites.
These kinds of tools support both finance and HR departments to make fact-based decisions, including managing workforce numbers and locations, as well as enabling them to use metrics that assess both departmental and individual performance.
Finance departments can benefit from these tools by getting a range of objective insights. For instance, payroll analytics tools enable businesses to see their global expenditure on payroll in real time, as all data is located centrally and so can be analyzed more efficiently. It also enables HR and top management to use current, trending, and forecasted data when making important staffing decisions.
Understanding and using objective insights
The objective insights that can be gained from payroll and other analytics tools help enterprises to identify trends and recognise patterns that can potentially impact cash flow.
These insights provide increased understanding of how a business actually runs, and therefore can be used to add value while at the same time identifying areas where costs are not being controlled as effectively as they might be. Knowing what is happening in your business — and, just as importantly, why it is happening — is essential to managing cash flow.
At the same time, analytics tools are not just a valuable asset for examining the current state of your business — they also provide the data and information that can be used to make financial forecasts.
Being able to make accurate predictions about potential future income sources and additional expenses is a key part of cash flow management, as it means you avoid the risk of an unexpected or unforeseen cash shortfall preventing you from paying staff or suppliers on time, purchasing stock, maintaining equipment, or simply meeting day-to-day running costs.
Making Informed Decisions Based on Data
A key benefit of employing analytics tools is that the data and actionable insights you gain, if used properly, can help businesses to optimise cash flow, manage expenses, and allocate resources more effectively.
Data driven decision making (DDDM) is essential to all sorts of businesses, but it is especially important when enterprises have a large workforce, operate in different locations, or engage workers on different contracts or terms.
In this scenario, acting without tools or processes that enable you to use business data to its full potential, is a sure way to create cash flow difficulties.
This is borne out by the results of a survey of business executives conducted by PwC (as reported by Harvard Business School), where it was found that enterprises that are driven by data are three times more likely to identify improved decision-making processes throughout the entire organisation.
Key to the value of data driven decision making is that it enables HR, payroll departments and top management to produce an informed, information-based validation for any proposed course of action.
However, beyond the process, there are other important benefits to be gained by the effective implementation of DDDM. Managers and executives can be more confident in the value of their business decisions, while also being more proactive rather than reactive, i.e., using analytics tools enables you to get ahead of the game and make better forecasts, rather than simply responding to what is currently happening.
The effective use of data and analytics tools also helps to improve operational efficiency and control costs, thereby enhancing a business’ capacity to operate more profitably.
The sort of analytics tools your business needs to use will naturally differ depending on the industry, sector or market in which you operate, but the sorts of benefits outlined above are accessible to all.
Therefore, whatever sort of business you run, it is possible to access and utilise analytics tools that will provide huge amounts of incredibly useful data that can be used to inform decision-making and support the better management of cash flow.
How a software company successfully used analytics tools to manage cash flow
All types of businesses can gain significant benefits from the application of analytics tools.
For instance, a software development company that integrated an analytics tool into its financial system, in order to monitor cash flow and project profitability, saw a range of significant benefits.
The data produced helped the finance department to track revenue and expenses associated with each project, thereby enabling them to identify cost overruns and better optimise the allocation of resources.
In addition, they made data-driven decisions, such as renegotiating vendor contracts and adjusting project timelines, that were able to improve cash flow and increase project profitability.