Deep Dive: How Businesses Solve Capital Management Conundrums

Businesses of all sizes struggle with capital management, regardless of whether they employ staff or seek out third parties to handle their cash flows, accounts payable (AP) and accounts receivable (AR) processes and other related tasks.

They can confront problems ranging from incorrect invoices and inadequate cash reserves to late payments from customers or to vendors — all of which require time and money to solve. A survey of 500 finance professionals found that 54 percent of businesses have sent invoices to the wrong recipients, for example, while 63 percent of businesses have received duplicate invoices.

Untold sums are lost due to these issues, leading businesses to develop or seek advanced technological solutions to fix them. Some of the most promising offerings leverage artificial intelligence (AI), machine learning (ML) or other advanced technologies that can reduce capital management complications and address those that arise.

The following Deep Dive explores the various automations businesses are deploying for their capital management needs as well as how such solutions can cut down on wasted funds and ease treasury professionals’ stresses.

Factors Affecting Working Capital Needs

Managing corporate capital requires firms to balance myriad needs and goals, many of which can conflict with each other. One objective is managing liquidity — ensuring that a company has enough cash on hand for its day-to-day business needs and any unexpected expenses. This affects companies’ creditworthiness, which is crucial to helping them secure loans.

Having too much cash on hand is a mixed blessing, however. Money in the bank generates little earnings for companies, especially if it could instead be used to fund new investments or technologies that drive revenues. It can also lead to bad spending habits, such as the over-approval of discretionary spending and a corporate culture of waste. This can also discourage investors or shareholders, potentially costing companies millions of dollars.

Inventory management is another perpetual challenge for corporates that, like liquidity management, involves striking a delicate balance between having enough inventory on hand and avoiding overstocking. Too little inventory can cause companies to run out of product, forcing them to delay or lose sales, while purchasing too much means that firms will have burned funding on items that will not sell. Some inventory can be sold off over time, but perishables or seasonal items, like food or fashion products, will eventually spoil or go out of style, meaning that they will never turn a profit for the company.

Handling AR and AP management procedures is another major hurdle that companies must overcome if they wish to operate at maximum efficiency. Both involve debt management but are essentially the opposite of each other, with AR referring to the money that customers owe companies and AP referring to funds it owes its vendors. Both share similar challenges, however, such as matching payments to invoices, receiving or sending payments on time, inaccurate or outdated reporting and incompatible payment methods. Failing to address these problems could cause a company to lose the trust of its vendors or customers, which could ultimately prove fatal to its business.

Each of these processes comes with unique challenges that can add up to cause headaches for treasury professionals. Many companies are thus turning to automated solutions to streamline these processes and make their employees’ jobs easier.

Automating Capital Management

AI-powered inventory and liquidity management are growing more prevalent in the corporate world, and they offer a number of advantages. Automated inventory management systems integrate with companies’ point-of-sale (POS) or invoicing systems and can enable platforms to automatically restock inventory as it is sold, for example, reducing the amount of effort and guesswork that goes into determining which products will be more popular and require larger orders. AI solutions can also more accurately compare inventory levels and sales, preventing employee theft.

AI-powered liquidity management systems are similar to automated inventory systems in that they can predict when cash will be necessary to have on hand and in what amounts. Many changes in liquidity demands are seasonal, such as around the holidays, when businesses see higher sales and inventory reordering. This can keep organizations from scrambling for last-minute funding from banks to ensure there is enough cash on hand, limiting stress on treasury professionals and preventing excessive employee turnover.

Systems that automate AP and AR processes are also gaining traction in the corporate world, integrating with corporates’ enterprise resource planning (ERP) systems and seamlessly processing supplier and customer invoices with minimal human intervention. A study found that 74.2 percent of finance leaders are evaluating or investing in AP and AR automations, with 67 percent focusing specifically on AI- and ML-powered systems.

No part of the business world is easy to navigate, and there will no doubt continue to be challenges in the capital management space. Automation could go a long way toward streamlining some of these problems, however, freeing up treasury professionals to focus on more pressing duties.