By Peter Klein, Co-Founder and CTO, FinLync
In today’s economy, on demand is a universal expectation. Consumers expect immediate access to products and services, from food delivery to medical advice. Meeting these expectations requires companies to maintain efficient—and often complex—supply chains to deliver goods on time. But when those supply chains are disrupted, such as during the coronavirus pandemic, companies must adapt swiftly.
Real-time cash forecasting allows treasurers and chief financial officers (CFOs) to anticipate and respond quickly to changing environments as well as make adjustments to control costs until conditions normalize. Moreover, cash-flow forecasting without real-time data can leave treasury teams exposed to imprecise estimates, leading to unintended consequences, such as excess cash sitting idle, insufficient funds to meet new needs and increasing interest payments. Supply-chain disruptions are just one of many examples illustrating the value of real-time treasury.
Lessons learned from recent supply-chain challenges
The issues that impacted supply chains in 2021 included spiking demand for goods, manufacturing delays, rising COVID-19 cases, extreme weather events, congested ports and the Suez Canal blockage. At the Port of Los Angeles, the largest port in the United States, heightened demand for goods led to a nearly 25-percent increase in total cargo1 over the 2020 volume. The spike in demand, in conjunction with a shortage of workers, led to significant delays. In November, RBC analysts reported that the turnaround time for a single ship at the port was 7.5 days2 compared to 3.5 days before the COVID-19 pandemic. In addition, the cost of sending a shipping container from China to the United States exceeded $20,000, a record high. These and other supply-chain factors drove increased costs across the board, with storage fees and other expenses related to delays impacting margins.
During a supply-chain disruption or any other kind of crisis, it’s crucial for the treasury department to have the information it needs at its fingertips. The sooner the team becomes aware of a problem, the more time it will have to plan a response and act quickly. Speed is critical to decision-making, and speed is only possible with access to real-time information. Ultimately, if your business is not accessing real-time data through bank API (application programming interface) connectivity, you do not have real-time visibility.
In some cases, it’s possible to hedge against the risk of rising costs. To do so effectively, companies need up-to-the-minute, accurate information about supply, demand and cash on hand. Companies with access to real-time data can make hedges and other adjustments more effectively and efficiently. The competition for having the most up-to-date data during the pandemic intensified, resulting in nearly half of supply-chain leaders increasing their investments in technology3 that provided better access to real-time financial data, including predictive analytics and AI (artificial intelligence).
Real-time treasury drives faster decisions in moments of crisis.
The recent supply-chain debacle caused increased costs across the board, impacting margins as shipping-container prices, storage fees and other expenses related to time delays rose significantly. In the event of a supply-chain disruption, real-time visibility into working capital via bank APIs allows companies to evaluate and implement short-term solutions, such as switching transportation methods (for example, sending goods by cargo plane circumvents shipping delays) or shifting temporarily from offshore suppliers to onshore sources that make the same products. Connecting to the bank via APIs enables the treasury department to instantly refresh its information on currently available balances and make sure enough cash is available to support changes like these.
With API connectivity to the bank, CFOs and treasurers always know how much cash is on hand and, in turn, whether external financing options are needed. This is particularly critical in times of crisis when it’s essential to keep management and the board fully updated on the company’s financial position. A CFO who lacks real-time visibility may have to answer to shareholders for the company’s inability to anticipate issues and adjust its processes to put goods on the shelf or deliver parts to customers. In most cases, it is less damaging to explain temporary increases in costs than significant drops in revenue.
Treasurers who are well informed about an evolving crisis are better positioned to brief the CFO on the potential impact of the crisis on the company as well as pinpoint the next steps detailed in the risk-management action plan, such as knowing how much can be drawn from a line of credit or whether additional credit is needed to weather the situation. Real-time financial data is also critical in determining whether the company can remain solvent in the event of a credit crunch. Finally, real-time visibility into both current and forecasted cash flows allows the CFO and treasurer to uncover and re-deploy unused cash to meet urgent needs. The ability to run a scenario analysis on a company’s cash status makes it easier to understand which options are most feasible.
Broad benefits of real-time treasury
Real-time treasury is important for sending payments and ensuring receipt on the other side. End-to-end payment tracking allows companies to follow transactions in real-time, which is useful when sending large wire transfers to new vendors or making other important payments. Making the transition to real-time treasury requires investment and effort, but the short-term challenges are worth it. This is especially true in times of crisis, but it is equally important to have real-time data when situations are normalizing in order to manage inventory levels effectively.
Treasury teams that invest in real-time will also gain an advantage over non-real-time competitors beyond the pure benefits of cash visibility. Payments that require multi-step initiations and confirmations open the door for potential unauthorized activities, while direct connectivity reduces the number of hand-offs required to complete transactions and, in turn, the opportunities for fraud. The real-time nature of bank APIs also enables them to continuously monitor for anomalies, stopping potentially fraudulent transactions before any cash leaves the bank.
The benefits of a fully streamlined treasury team extend beyond the ability to maintain cost control. The war for talent looks poised to continue to intensify in 2022.4 Employees are much more selective about the jobs they will consider taking, leaving employers fighting for every advantage they can find. This is especially true of treasury and finance professionals looking for more fulfilling work. Instead of being stuck collecting data for hours every day, professionals want opportunities to advise the business and drive transformation. With less waiting and fewer delays, professionals who have access to real-time data are more strategic, more engaged and ultimately more likely to stay at a job in which they feel fulfilled and empowered by the technology to which they have access.
Today’s fast-moving business environment demands that treasurers make efficient, accurate and effective decisions about cash. Embracing real-time treasury provides executives with the financial insights they need to not only stay afloat but thrive. When a crisis hits, CFOs need to have the tools, methods and understanding in place to assess risks. Without knowing where cash is right now or in the near term, it’s difficult to assess options for resolving obstacles and mitigating costs. Real-time treasury sets businesses up for future success by enabling them to make better decisions, whether during the critical moments of a crisis or as part of day-to-day planning and execution.