How Faster Payments Can Show Future Of SMB Cash Flow

Advances in data integration and automation have taken small- to medium-sized business (SMB) accounting to the next level.

In the effort to migrate SMBs and their accountants away from spreadsheets, technology now enables accountants to spend less time on manual number-crunching and more time on strategic processes. Yet despite improvements in accounting software, cash flow management remains a headache that threatens the very existence of many companies.

Survey after survey reflects how large SMBs’ cash flow woes really are. Last year, Intuit’s global survey revealed 61 percent of SMBs struggle with cash flow, with payment processing delays one of the largest culprits of this challenge. Only weeks later, SMB lending platform Kabbage found nearly two-thirds of SMB owners cite cash flow concerns as the cause for their anxiety.

With so much automation power in SMB accounting today, why are SMBs still tripping over cash flow?

According to Colin Hewitt, founder and CEO of U.K. FinTech Float, this struggle lies in the fact that accounting continues to focus on the past — and cash flow is all about the future.

“The gap between what has happened and what might happen is often the problem in cash flow,” he told PYMNTS in a recent interview. “Cloud accounting providers’ focus is on making sure you pay your taxes, and you have your reporting. Traditionally, their whole focus has been historical.”

The Data Integration Starting Point

Cloud accounting platforms may not be focused on future cash flow forecasting, but as Hewitt explained, these solutions offer a valuable starting point for cash flow management.

That’s thanks to their emergence as a data consolidator, particularly in markets like the U.K. in which open banking has enabled accounting portals to receive information directly from businesses’ bank accounts, as well as from other platforms like accounts payable, accounts receivable, payroll, expense management and beyond.

It’s this position of SMB accounting technologies that led Float, which recently announced nearly $2 million in seed funding, to take a value-added service approach to cash flow management. The company overlays on top of existing accounting platforms to take advantage of the data that already exists because historical information from payments made and received is one important factor of predicting future cash flows.

“We’re looking at it from a very different, perhaps more hypothetical point-of-view, certainly more future-oriented,” he said. “That’s never going to be the core work of accounting, but they have a rich source of data that helps get an accurate starting point. And if you don’t have an accurate starting point, forecasting becomes less clear and reliable.”

Peering Into the Future

SMB owners and their accountants are becoming more comfortable with the security and reliability of open banking data integrations, empowering these professionals to obtain real-time access to not just historical data, but future data, too.

Cash flow management isn’t just about understanding which invoices a business has paid and which incoming payments have been completed, said Hewitt. It’s also about understanding which outstanding invoices are expected to receive payment tomorrow, or the value of employee reimbursements on expense reports at the end of the month.

“This is one of the biggest challenges, is pulling together all of the different sources of data for accurate cash flow,” he said. “That’s all of your bank transactions coming in and out — what’s happened — and you need to know what’s going to happen next.”

As the pace of business accelerates, Hewitt noted that initiatives like faster and real-time payments — which are now ubiquitous in the U.K. but remain in their early stages in markets like the U.S. — have had a significant impact on the ability of cash flow management solutions to access data in real time, even as that data is constantly changing. What faster payments has enabled, he noted, is a more accurate view of cash positions, and the data to reflect it.

“The worst thing is that transition period between when you think you’ve made a payment and when it shows up on your bank feed,” he said. “That was a big problem for small businesses, having to wait a few days wondering about a transaction coming in.”

He highlighted scenarios in which a business might have been expecting an incoming payment in the accounts receivable department. When spending is based on that unconfirmed assumption, an SMB can quickly run into trouble if it makes a purchase only to discover that the initial incoming payment never actually arrived.

Looking Even Further Ahead

Today, in the U.K., faster payments not only connect businesses and their accountants to that transaction data in real time, but increasingly, platforms are expanding visibility to display expected transactions in the future.

As accounting, data integration, and real-time transacting technologies evolve, Hewitt said SMBs and their accountants will have an even wider opportunity to access accurate insight into past, present and future cash positions, particularly as technologies like artificial intelligence step in to provide greater context around that data.

Increasingly, Hewitt predicted, cash flow forecasting will support a deeper connection between buyers and suppliers to streamline the flow of payments (and data) between businesses, and is also likely to have a significant impact on SMBs’ access to capital as underwriting can occur more efficiently.

This trend, he added, will also continue to disrupt the accounting profession overall.

“Smart accountants are realizing that with automation, the opportunity is in becoming more advisory,” he said. “They can be more supportive and proactive in helping these small businesses thrive.”