Harnessing data analytics to optimize cash flow
By Kate Brown, Wipfli LLP, Parter, Data & Analytics
For companies, particularly companies in their early stages, regular cash flow reviews can be a useful tool to ensure ongoing financial health. Cash flow is an essential metric that, if properly monitored, can provide operational continuity and the ability to capitalize on opportunities for growth.
Data analytics is a useful tool that can harness a company’s internal data and help optimize cash flows. Uncovering important insights by analyzing your existing data can help your business manage sales, inventory, accounts receivable and customer segmentation.
What are the key factors do you need to take into account?
Key cash flow variables
1. Inventory
Optimizing inventory is essential to cash flow management. It’s important that companies anticipate and plan for issues like deadstock, supply mismanagement, and wasted inventory. Ask yourself these difficult questions to determine your business’s readiness:
Do we fully understand the supply chain? Companies with a clear picture of their supply chain can use that insight to reduce bottlenecks and streamline processes for optimal inventory management — which leads to significant cost savings and increased customer satisfaction.
Are we prepared for a disruption in the chain? Knowing the components of your supply chain, from your suppliers to your customers, can help you protect against vulnerabilities. Proactive risk mitigation, like identifying disruptions or quality issues, can help you maintain continuity.
Smart data analytics practices can help you manage cash and deliver on commitments to customers by giving you answers to some key questions, such as:
- What do we need to deliver?
- When do we need to acquire it?
- When do we need to deliver?
Good quality data can help you predict inventory levels and identify when your stock is nearing depletion, so you can work with your customers to delay orders or offer substitutions. Data analytics can give you insight into:
- Order quantities
- Reserving stock for important customers
- New business acquisitions
- Communication strategies
2. Customer and product segmentation
Another key component of cash flow management is understanding your customers and the profitability of your products. By analyzing your data, you can gain a critical line of sight to both the big picture and the transaction-level details.
Traditionally, customer profitability analysis applies an average cost allocation to all products and customers. This tends to distort reality, because different products can drive different holding costs and the levels of servicing costs for different customers can vary.
- With data analytics, you can observe transactional details, which allows you to trace costs to specific products and customers.
- Determining which products and customers are driving profitability and which are holding you back becomes easier when you look at the numbers behind your transactions.
Some companies make the mistake of discontinuing product lines or severing ties with customers due to traditional customer profitability analyses. But with a strong data analysis strategy, you can make better cash flow decisions by:
- Understanding your key variables and performing what-if analyses
- Identifying purchasing scenarios and sales circumstances that consistently lead to profitable outcomes for your business
3. Receivables
Many businesses become complacent in the area of receivable management. But data analytics can help identify internal policies and processes that are impacting outstanding invoice collection. With a solid data strategy on your side, you can:
- Pair receivables with invoicing programs for prompt delivery
- Improve the accuracy of cash flow statements by identifying accounts with a history of delinquency
- Determine discount arrangements to incentivize timely payment
How Wipfli can help
Data analytics offer the opportunity to not only identify trends and opportunities with existing policies and practices but also open the door to a deeper understanding of important trends with customers, suppliers, and more.
If you’re ready to optimize your analytics practices, contact us today. Our dedicated professionals can help you leverage the latest business intelligence tools to improve your operations, get a handle on your data, and manage your cash flow better.
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