The importance of cash flow
Any organisation – commercial, government, or not-for-profit – needs a healthy cash flow to support its immediate objectives and its longer-term goals.
The reason is very simple: if your organisation can’t pay suppliers, employees, or partners on time, chances are you will not survive for very long; regardless of how promising your business idea is or how noble your goals are as a non-profit. Government organisations may sometimes be an exception to that rule but they, too, will run into trouble without a healthy cash flow.
SMBs (i.e. Small & Medium Businesses) in particular are likely to encounter cash flow problems. According to research done by Xero in July 2018, just over half of all organisations surveyed were cash flow positive*. This means, of course, that almost half of the participating organisations were in immediate need of help to get their cash flow back on track. What’s more, these results do not account for those organisations that, indeed, were cash flow positive though not positive enough to help achieve their organisational goals and objectives.
*Xero Small Business Insights data, UK, AU & NZ, 1-31 July 2018
Taking control of the operational cash flow
For the purpose of this blog, we will look at how to control the operational cash flow – meaning the net difference between all of the cash received and all of the cash spent during a set period of time; be it a month, quarter, half-year, or a full year.
For this calculation, all operational income, such as that from sales for commercial organisations or from donations for NFPs, must be properly recorded and coded in your main accounting system, e.g. Xero. In the same system, you also need to accurately record and code all your operational expenses, such as invoices from your suppliers or your reimbursable employee expenses. Collating both in one system will form a reliable base for establishing your cash flow at the end of each period.
But this paints only half the picture as a calculated cash flow does not point out what your organisation (or your client, if you’re a Xero partner) would need to actually improve cash flow. In fact, the only thing you now have is a figure which says little on how it came about, or where exactly there’s room for improvement.
So, if you want to strengthen your cash flow, you’ll need to first pinpoint all relevant details (i.e. how money was received and how money was spent) and then take it further to find out if and how you can either increase your income, spend less, or, preferably, do both.
However, even when you have analysed the relevant data and (hopefully) found a way to improve your cash flow, you are still faced with a task that is probably just as complex as what you’ve achieved so far: implementing the necessary changes, making sure that they are being complied with, and confirming that they are producing the results you expect.
In short, you will definitely need – and most likely appreciate – some help to achieve your goal!
The latest Xero cash flow app playbook
To help Xero partners and customers take control of their cash flow, Xero has recently (in November 2018) published a new playbook in their popular app advisory playbook series.
In its new Cash Flow App Playbook, Xero is focusing on multiple aspects of cash flow health management – from improving efficiency and providing cash flow insights to creating and executing a cash flow action plan. As this is an app advisory book, Xero highlights multiple cases and scenarios regarding cash flow management and provides a comprehensive list and comparison of the various Xero Marketplace apps which are part of each scenario.
The three main functional areas Xero addresses in this app playbook are:
- Data Automation, including Bill Automation and Expense Automation
- Cash Flow Forecasting
- Cash Flow Action Plan, including Payment Services and Debtor Management
In this blog, we will take a closer look at Data Automation, and especially at Bill Automation.
Data Automation – what it’s about
Data Automation, as specified by Xero, comprises the automated activities which ensure that all data used for cash flow control, forecast, and improvement is as correct, up-to-date, and clear as possible.
Boosting efficiency by minimising manual and routine work plays a major role as do the easy-to-use, capable tools for partners and organisations Xero provides. The aim is getting all relevant data into Xero with as little effort as possible, and handling it appropriately once it’s in there.
Data Automation therefore includes activities and operations such as:
- Document submission, for example:
- Creating and submitting Purchase Orders
- Receiving and recoding supplier invoices, including line-by-line extraction and recording
- Submitting reimbursable expenses
- Accurate approval of Purchase Orders, Bills, and Expenses
- Practice management, including proper archiving
- Client management, including mobile app, reminders, and exception handling
- Reporting and analytics, including audit reports and expense reporting
- Fraud detection policy management
As you can see, it’s a rather comprehensive list of activities, covering everything you need to think of in the context of cash flow control and optimisation.
The essential role of Bill Automation for your operational cash flow
Of all the different aspects regarding data automation which Xero outlines in their app advisory playbook, one stands out as even more important than the others: Bill Automation for dealing proficiently and efficiently with your supplier spending.
Unless you have a very specific organisation, employee expenses – the other part of your operational cash flow spending – are probably much lower than the total of your incoming supplier invoices.
Consequently, taking control of your bills – what ApprovalMax frequently refers to as Spend Control and Optimisation– really should be the priority in your quest for cash flow control and optimisation.
To do that, you need to achieve the following key milestones:
- Make sure that all internal and external documents (e.g. Purchase Orders, Invoices, Bills) are available in fully digital format and stored in your accounting system of choice – i.e. Xero.
- Establish a proper approval workflow for documents such as Purchase Orders or Bills which require a review from someone outside your accounting team to ensure that these documents have been fully approved before being sent to suppliers, or paid.
- Establish effective financial quality controls in the form of review and coding. This will allow you to properly allocate – and use in your cash flow analysis and forecasting – any spending recorded in Xero.
Implementing Bill Automation made easy
To achieve (A), use one of the leading data entry solutions by Receipt Bank, HubDoc, AutoEntry, or DataMolino. The Xero cash flow playbook provides comprehensive feature-by-feature analysis of these applications, helping partners and customers select the app that suits their needs best.
Achieving (B) and (C) requires a sophisticated, cloud-based approval workflow system such as ApprovalMax, which Xero features prominently in their cash flow app playbook. Providing a crucial aspect in any Bill Automation scenario, ApprovalMax enables spend control and optimisation for organisations of all sizes.
ApprovalMax also extends Xero with fully digital processes for efficient spend and revenue management. It provides multi-role and multi-tiered approval workflows for Bills, Purchase Orders, Credit Notes, Sales Invoices, and enables Purchase Order creation and approval outside of Xero. It also facilitates X-way matching of Bills and POs, and supports budgeting control.
Coupled with Xero, ApprovalMax facilitates a flexible definition of approval authorisation levels and the automation of approval processes for finance and accounting. This ensures better process control and visibility, and fosters compliance and audit readiness for both in-house and outsourced accounting processes.
ApprovalMax works natively with leading data entry systems and can be either seamlessly added if a data entry tool is already in place, or get implemented first and then paired with a future data entry solution once selected.
Bill Automation can make a real difference and helps any organisation to ensure a healthy cash flow. Best practices for implementing Bill Automation using ApprovalMax along with valuable advice on the topic are featured in our recent Webinar. Watch here.
The bookkeeper’s guide to efficient invoice approvals
Learn how to strengthen your accounts payable process with approval automationDownload now