Managing Cash Flow through Data Analytics

Every business should regularly review cash flow and optimization opportunities to ensure the highest level of financial vitality. Maintaining a clear picture of this important metric is not only essential to effective decision making but also necessary for managing the unexpected. The COVID-19 emergency left many without the ability to generate income due to forced business closures, stay-at-home orders, and general fear of virus transmission. While these events are almost impossible to predict, maintaining a clear cash flow picture can make managing such disruptions less painful.

For those who may not have a robust management process in place, the good news is data analytics offers the opportunity to analyze existing data to uncover important information. Data analytics can help businesses understand and manage sales, inventory, accounts receivable, and customer segmentation, especially important during the recovery. To help clients, prospects, and others, Clayton & McKervey has provided a summary of key considerations below.

Key Cash Flow Variables

Receivables

Data analytics can help management understand how internal policies and processes are impacting the collection of outstanding invoices. Even in situations without a pandemic causing economic chaos, businesses can become complacent when it comes to receivables. Data analytics can help in this area by:

• Pairing receivables with invoicing programs to ensure prompt delivery
• Predicting payment dates for those with a history of delinquency, thereby improving the accuracy of cash flow statements
• Identifying situations where it makes sense to offer discounts to incentivize timely payment

Inventory

Maintaining optimal inventory levels is key to cash flow management. In order to optimize inventory, identify trends to anticipate and adapt to avoid inventory issues like deadstock, supply mismanagement, or wasted inventory. The analytics, in this case, begin with some tough questions:

• How well does the business understand the supply chain? Often there are six or more degrees of separation between the business and supplier. For this reason, it is essential to gain a clear understanding of the entire supply chain and begin to determine where potential issues may exist.
• What if one of those in the chain falters? Collect, buy, or bargain for the insights that will be provided by this multi-tiered visibility.

In today’s economy, companies who sell products in high demand, like disinfectants, are looking to secure additional stock, especially since regular suppliers may be approaching capacity. Those that properly leverage data analytics are able to gain actionable insights into product categories and suppliers, allowing them to plan for contingencies accordingly.

Not only for cash management purposes but in order to deliver on commitments to loyal customers, analytics dashboards can summarize data that helps businesses understand:

• What is needed?
• When will it be needed?
• When will it be delivered?

Analytics can also predict when inventory is approaching depletion so businesses can work with customers to offer substitutes or delay orders. Data analytics enables insightful decision-making about:

• Ordering appropriate quantities
• Reserving stock for particular customers
• When it makes sense to acquire new business
• Most effective communication strategies

These decisions heavily rely on the availability, accuracy, and usefulness of data. On the other hand, companies experiencing a severe downturn can use analytics to make difficult decisions about how to reduce inventory expenses and cash outflow most effectively.

Customer and Product Segmentation

Successful cash flow is also determined by how well businesses know existing customers and product profitability. A data driven analysis allows line-of-sight to the big picture as well as critical minute transactional details. A traditional customer profitability analysis distorts reality by applying an average cost allocation to all products and customers when, in reality, different products drive different manufacturing costs and different customers drive variable levels of servicing costs. Often these differences are significant.

• Analytics makes it easy to drill down to transactional details and trace costs to specific products and customers
• It then becomes easy to determine which products and customers are driving profitability and those that are not cutting it

Traditional customer profitability analyses often lead businesses to discontinue entire product lines or sever ties with customers who appear unprofitable. Analytics provides the opportunity to make better cash flow decisions by:

• Performing what-if analyses on key variables
• Understanding the exact combinations of production scenarios and sales circumstances that consistently produce losses

Better informed decisions to discontinue products or sever ties with customers can now be made with much more useful information. Conversely, insights about the most profitable products and customers can also materialize.

Cash flow management, especially during the COVID-19 emergency, is a focus area for many businesses. Data analytics offers the opportunity to not only identify trends and opportunities with existing policies and practices but opens the door to a deeper understanding of important trends with customers, suppliers, and more. If you have questions about the information outlined above or need assistance, Clayton & McKervey can help. For additional information call us at 248.208.8660.