5 min

What should I look for in a cash flow management solution?

Author
Noam Mills
Published
Sep 9
2024

Key Takeaways

  1. A comprehensive cash flow management solution should include features that allow for real-time tracking and forecasting of cash inflows and outflows
  2. Integration with existing financial systems is essential for a seamless flow of data, reducing errors and enhancing overall efficiency in cash flow management.
  3. The solution must offer robust reporting and analytics tools to provide deep insights into cash flow patterns and informed financial decisions
  4. Flexibility and scalability are crucial in a cash flow management solution, ensuring it can grow with the business

As companies grow, so do their cash management requirements. This leaves CFOs and treasury teams with new challenges to deal with. They need to manage multiple accounts across multiple currencies and geographies, ensure optimized use of financial instruments like credit lines and investments, gain control of their liquidity status, forecast cash flows, and more. The cost of an error is high, which is why many teams turn to cash management solutions at this stage.

Modern cash flow management solutions are automated platforms for optimizing cash flow. Some of them are also AI-driven. Instead of dealing with bulky, complex spreadsheets, they collect all your cash flow data into the platform. and present it with an additional layer of analysis. This streamlines the cash management and forecasting processes, ensures up-to-date visibility, and helps lean finance teams to manage cash risks, optimize liquidity and increase ROI on excess cash or debt.

While the benefits of adopting a cash flow management solution are obvious, choosing the right solution can be challenging. The following items should not be missed when evaluating your solution. Following this list ensures you are able to maximize your efforts and free yourself up for other responsibilities. 

A robust cash flow management solution is essential for real-time financial tracking, ensuring that your business stays on top of its financial health with accurate and integrated data

1. Complete cash visibility

Obtain a comprehensive and complete daily view of your cash positioning, including all bank and payment accounts. Make accurate and relevant short-term and long-term decisions with confidence without errors and data integrity risks. Look for:

  • A single and centralized dashboard
  • Up-to-date liquidity snapshot of cash, investments, and restricted cash
  • Ability to filter across accounts, institutions, currencies, and more
  • Daily/monthly cash reports
  • Trends analysis
  • Customizable reports

2. Reliable and comprehensive data connectivity

Probably the most important item on the list - Ensure your cash management solution brings in all the data you need to manage your cash flow. This will ensure your data is reliable, regularly updated, comprehensive, and enables you to make decisions that support your financial needs. Look for:

  • Data connectivity via APIs to all global financial institutions, including banks, ERPs, and cash platforms, and any other financial systems that you use so that your data is regularly updated.
  • Reliable data connectivity when APIs are not available, or not supported. Make sure there are alternative methods of gathering data from all financial institutions, even those that don’t support API connection, so you can get full cash flow visibility across all your accounts.  
  • An overview and deep-dive of your cash flow and all activities including:
    - Reconciliation of transactions
    - Inflows and outflows
    - Trends
    - Historical balances

3. Reports and insights

Identify and prevent cash-related risks and identify and seize cash-related opportunities to optimize cash management and ensure errors are prevented. Look for:

  • Actionable insights for effective cash management
  • Alerts that allow immediate response
  • Ability to set up account automatic buffers to improve capital efficiency and transfers
  • FX hedging support

4. Resource efficiency

Make sure using your cash management solution is easy and intuitive to use. This will be one of its main advantages over using Excel: replacing manual work, accessible from anywhere, and freeing up you and your team for other prioritized needs. Look for:

  • Self-serve: No IT required
  • Tagging capabilities
  • Easy setup
  • SaaS solution
  • Collaboration capabilities

5. Smart categorization abilities

Manage your accounts, transactions, and cash positioning to accurately analyze your current and future cash flow. Look for:

  • Ability to create customized categories and sub-categories
  • AI-based categorization process to replace your manual labor
  • Automated ERP matching

6. Forecasting abilities

The adoption of a new cash management solution is a great opportunity to automate your cash forecasting, increase its effectiveness, and improve forecast quality by reducing human errors.. Look for:

  • Easy comparison of forecasts against actuals
  • Easy data collection and categorization, including ERP data
  • Customizable forecasting methods for your business
  • AI-based forecasting for tailored insights

7. Security

Safeguard your organizational data to ensure your cash flow data is secure, comprehensive, reliable, and available for you to use. For data security look for:

  • Compliance with leading regulations like SOC 2
  • Application security through practices like third-party penetration testing and vulnerability scanning
  • Data encryption in transmission and at rest
  • Real-time monitoring of risks and policy compliance
  • Access management- RBAC, least privilege, etc.
  • Secure development practices

What’s Next?

Choosing the right cash management solution is a strategic choice, since it will directly impact your ability to streamline financial operations, manage liquidity, and optimize cash flow. Therefore, this decision should not be taken lightly. Use this checklist to evaluate and compare different solutions. Don’t be afraid to ask vendors the difficult questions it raises, from which data they connect to to how they support forecasting, and more. By comprehensively comparing solutions, you can ensure your treasury operations will be more robust and accurate than ever. 

Learn more about Panax’s cash flow management solution that supports lean finance teams with complex treasury management needs.

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AI
Data connectivity for finance: everything you need to know

Cash flow management is the lifeblood of your treasury operations. It allows you to properly and accurately track the money that is coming in and out of your business and to forecast cash flow needs. A comprehensive and reliable data set is the basis for a reliable and effective management of cash flow.

In this blog post, we co​​mpare three popular technologies used to gather cash data including: file-based systems, APIs and modern data connectivity systems. We dive in to see which ones help CFOs and treasury teams obtain accurate and relevant data to enable financial health and relevant forecasting.

Cash Flow Management Requirements

Before diving into the three technologies, let’s look at the requirements treasury teams have from cash management technologies and solutions:

A modern cash flow management solution should ensure:

  • Data freshness - Providing and displaying fresh and up-to-date financial information, at all times. This allows you to always have a clear and up-to-date picture of the company's financial situation and health. Fresh and up-to-date data is essential for managing liquidity, optimizing working capital, avoiding potential cash shortages or surpluses, addressing discrepancies and enhancing overall financial accuracy.
  • Data richness - Ensuring financial data is complete in depth and breadth, including transaction descriptions, vendor descriptions, information on transaction senders and receivers, historical data and multicurrency data support. Rich data provides a comprehensive view of all financial transactions, trends, and patterns, enabling more accurate forecasting, granular financial analysis, and improved budgeting and strategic planning.
  • Format standardization - Creating standardization among financial data and establishing standardized formats for financial data entry, reporting and documentation. This ensures consistency, accuracy and efficiency across financial processes, leading to improved overall quality and reliability of financial information.
  • Security - Implementing access control to determine who can interact with financial systems and what data they can access. This protects sensitive financial data from breaches and cyber threats, maintaining the trust of stakeholders and ensuring compliance with security standards and regulations.
  • Future-proofing - Adopting scalable and flexible financial management tools that integrate with other business systems, are capable of handling increasing transaction volumes and complexities as the business grows, and use AI to enhance analytics and insights.
  • Streamlined processes - Simplifying and automating tasks such as information gathering, cash categorization, cash positioning, reporting, trends analysis and forecasting. This allows finance teams to focus on strategic activities rather than administrative duties, leading to better decision-making and more reliable forecasting. Additionally, reducing friction in cash flow management enhances the user experience, resulting in happier, more productive treasury teams.

The Problem with File-based Systems

Cash flow management has relied mostly on file-based systems for performing financial transactions and reporting activities. This often involves direct connections to banks using SFTP servers, with files being transferred daily or at intervals of several days. Legacy companies sometimes even resort to proprietary system access. Even the widely-used SWIFT network still operates on messages, which are basically file-based.

These systems are better than their predecessor - manual actions. They help make the process more efficient and provide better visibility and control.

However, these systems also create their own set of challenges for treasury teams.

  • Setting up and maintaining file-based transactions is a complicated and manual process. It  requires specialized knowledge, cutting through red tape, overcoming cumbersome processes with multiple steps and stakeholders and constant upkeep.
  • File-based connections lack modern security measures.
  • Not all file formats are created equal. From MT940 to BAI2 to other formats, ingesting, aggregating and normalizing these data formats is a complicated and error-prone process.
  • Files are delivered in bulk, meaning data is updated periodically rather than in real-time. This compromises the ability to make real-time decisions and have an accurate financial picture at any given time.
  • Multiple file formats delivered at different times can compromise data quality.
  • Data granularity is limited to the information sent in the file, rather than being enriched by a system.
  • File-based systems lack the ability to scale, integrate with modern systems and evolve with technological advancements.
Seamless data connectivity is the backbone of modern financial decision-making, enabling accurate, real-time insights that drive business success

Are APIs Enough?

Many financial teams use APIs provided by banks, payment processors, financial service providers, financial aggregators and other financial entities. These APIs are used to connect their own internal systems with these external services. APIs act as the intermediaries, enabling secure and standardized communication between different systems. With APIs, treasury teams can enhance operational efficiency and enable better financial management.

However, despite the advancements APIs enable, connecting via APIs still involves friction for treasury teams:

  • Setting up API connectivity is cumbersome, manual and sometimes complex
  • The provided data is not always standardized and therefore lacks a real-time view of the financial status
  • The data arriving from the financial institution, may be lacking and missing, sometimes due to the way APIs were configured
  • Not every bank or institution offers an API, and not all APIs are the same. While some are robust, fast, and easy to implement, accompanied by clear documentation, others lack any or all of these features. 

Modern Data Connectivity Systems

The next generation of connectivity comes with the new model data connectivity systems. These data connectivity systems leverage the advantages of each type of technology while adding on more layers of data, normalization and analysis.

Modern data connectivity systems include:

  • File-based connections and APIs
  • Additional host-to-host connections
  • An additional layer of synthesis and analysis, presenting all financial information in a standardized and easy to consume format
  • A real-time and rich picture of the financial status and health
  • Modern integrations and technologies
  • AI for better data quality

These capabilities reduce overhead, enhance data quality and support scale. They are also flexible enough to adapt to any future needs.

File-based vs. APIs vs Modern Data Connectivity: A Comparison Table

Conclusion

Optimal and accurate cash flow management is essential for building and maintaining healthy treasury operations. Choosing the right technology ensures you always have an up-to-date view of your cash flow position, complete with insights for forecasting, without worrying about the overhead of adding data or security.


Learn more about Panax’s modern data connectivity technology here

5 min
About Panax
3 Steps to improve capital efficiency across multiple banks & geos

As companies grow and expand their operations and commercial activities, finance teams find themselves managing an increasingly complex cash footprint. 

They often manage dozens of bank accounts scattered across a number of financial institutions, handle accounts in various currencies, and oversee cash stored in non-bank institutions like payment processors, PayPal, and FX wallets. 

This creates a slew of challenges, from operational friction, to counterparty risk management, and down to a growing lack of control. In turn, these lead us to one of the biggest head-scratchers finance teams face nowadays, which ironically also has the most impact on their company’s bottom line – how to improve capital efficiency when cash is so extensively distributed?

In the current interest environment, every dollar counts. Finance leaders strive to invest excess cash to maximize yield on one hand, and minimize usage of credit facilities to reduce interest costs on the other. 

To address the capital optimization challenge, which is likely to intensify given the growing wave of globalization and global expansion, let’s go over a simple 3-step framework that will help your team optimize capital efficiency across multiple accounts:


Consolidating financial accounts is a key strategy for reducing inefficiencies and ensuring that capital is managed effectively across the organization


1 - Define and measure your top-level metrics

The first step to improving any metric is to clearly define it so you can properly measure it. When it comes to capital efficiency, even a simple KPI such as % of cash in interest-bearing accounts (% IBC) is a great starting point. 

Monitoring it will undoubtedly help you lead better cash management and at the very least – raise important flags regarding your company’s cash utilization.


2 - Identify drivers and set up buffers

Once a top-level metric is defined, it’s critical to understand what’s driving it in a more methodical way. In the case of % IBC (interest-bearing cash), the second-level metric we should focus on would be the amount of operational cash needed in each account. 

Since this number tends to fluctuate significantly over time, it’s good practice to define “buffers” – minimum and maximum cash thresholds that are highly likely to ensure account liquidity. Defining these buffers can help you shed instant light on inefficiencies and opportunities for IBC improvement. 

Adding a time dimension to these buffers can often have a massive impact on your capital efficiency. Some accounts require liquidity only on specific dates, which are often monthly and follow a clear historical trend. Enabling the buffers to fluctuate with each account’s monthly needs is therefore a great way to improve your IBC rates on an ongoing basis.


3 - Set up a cash forecast and monitor your liquidity

The highest level of buffers planning is building and maintaining a rolling cash flow forecast. This is a great tool to help you understand upcoming cash needs and identify trends in a granular way, so you can more accurately understand the required buffers that optimize capital efficiency, and then take immediate action when needed.

Bear in mind that access to fresh data is key to be able to properly track balances across your accounts. While monitoring can be performed manually, it’s an incredibly tedious, time-consuming process that becomes increasingly harder to manage as companies open more and more accounts. 

Automating your bank connectivity is how you can turn real-time, account-level liquidity insights into timely decisions that will have a direct impact on your company’s performance and bottomline.

In today’s fast-paced and complex reality, the incentive to take back control, proactively manage cash flows, and optimize capital efficiency – is loud and clear. Automatically measuring, monitoring, and managing capital efficiency are key to ensuring cash is efficiently managed and effectively utilized.

Remember: any day in which cash is sitting idle is a waste. It’s time to stop the squander.

5 min
About Panax
Panax wins "Best-In-Show Fintech" award at '23 Fintech Fusion conference

Nowadays, it's hard to imagine a reality in which banks and fintech are not closely intertwined. But this wasn’t always the case, and it was only during the last decade or so that we've witnessed banks open up their digital gates to fintech solutions in an effort to improve their operations efficiency, brand reach, competitive edge, customer retention, and customer satisfaction.

Fintech Fusion

This year's Bank Fintech Fusion was held in late October to celebrate the inseparable and growing bond between the banking and tech worlds. Each year, this event puts a spotlight on tech companies that help push the boundaries of traditional banking and offer tangible solutions to costly problems.

That's why we're beyond thrilled to share that Panax has hit yet another major milestone by being selected as the "Best-In-Show Fintech" startup for 2023.

We are truly grateful for this outstanding recognition, and firmly believe it's a testament to our ongoing commitment to disrupt traditional cash flow management using automation, unmatched assets connectivity, and AI.

The Panax team is continuously dedicated to helping finance teams around the world regain full visibility into their cash reserves across accounts, banks, and currencies, optimize their cash flow management, make smarter investment decisions, and plan ahead using proactive, AI-driven alerts.

5 min
About Panax
Panax submits an additional patent application for its innovative AI-driven cash management platform

Exciting news! At Panax, we’re proud to announce another big step in our mission to transform cash management for finance teams. We recently filed another patent application for innovative technologies that simplify complex treasury tasks.

Our latest patent filing: Method and system for implementing a recommendation platform for financial institution policy engine.

What does this mean?

This patent application describes a system that helps financial teams govern how businesses distribute their funds, to ensure they comply with policies. In simple terms, it works like an AI-driven financial watchdog. The Panax platform uses AI to customize financial policies based on a business’s size, location, revenue, and industry. This makes risk management and compliance more adaptive and tailored to each company rather than using a one-size-fits-all approach. 

What value does this technology give to finance teams?

This technology allows finance teams to work more efficiently and strategically by reducing manual, time-consuming treasury operations, such as risk monitoring and compliance enforcement. The AI algorithm tailors policies to each business, reducing false alarms and allowing teams to focus on high-priority tasks. Finance professionals can streamline financial oversight, improve accuracy, and proactively mitigate potential problems.

This new patent application joins our previous two patent filings:

1st Patent application: Method and system for automatic cashflow categorization of bank transactions

What does this mean? AI driven transaction categorization. Our AI technology automatically categorizes transactions, saving time and improving cash flow forecasts. This helps finance teams make better, faster decisions. Accurate categorization is key to providing more accurate reporting and forecasting

2nd Patent application: Method and system for ranking data connectivity of communication channels established between a data exchange server and a plurality of remote servers 

What does this mean? Advanced data connectivity. Panax connects to over 10,000 global bank accounts, cash platforms, and ERPs, via API first, as well as traditional and innovative connectivity methodologies, giving finance teams a complete, real-time view of their cash. This eliminates data silos and improves decision-making.

Looking Ahead

These patents are just the start. At Panax, we’re committed to pushing boundaries and building technology that helps finance teams focus on growth and efficiency. By leveraging AI to improve connectivity and advanced risk assessment, we’re empowering finance teams to work smarter, not harder.

As CTO and co-founder, I’m thrilled about what we’ve accomplished and excited for what’s next. Panax isn’t just a product—it’s the future of cash management.

5
Working Capital
Mastering working capital management approaches for long-term business success

Smart working capital management is important for any business— it creates financial stability, supports operational productivity, helps avoid emergencies, and enables growth. In essence, managing working capital  is about balancing your short-term assets and liabilities for a stable and resilient business. You master working capital management through a flexible, strategic policy.  

What is a working capital management policy and why does it matter?

At its core, a working capital management policy governs how a business manages its short-term assets (cash, inventory, receivables) and short-term liabilities (accounts payable, debt). A thoughtful policy ensures a company always has the liquidity to meet its day-to-day operational expenses while balancing profitability and risk.

Many businesses typically create a working capital management strategy around the following factors:

  1. Industry needs: Some industries, like retail and manufacturing, require large inventories, while others, like consulting firms, operate with minimal working capital assets.
  2. Growth objectives: A rapidly expanding business may prioritize reinvestment and lean operations, while a mature firm might focus on maintaining reserves for stability.
  3. Risk appetite: Companies with lower tolerance for financial risk may prefer conservative strategies, but those wanting to rapidly expand might use different tactics.

Additional factors can include:

  • Sales volume and the possibility of accounts receivables
  • Nature of credit policy
  • Degree of seasonality 
  • Production policy of the company and the rate of production maintained
  • Competitive conditions 
  • Dividend policy 

Your policy should align with  your company’s strategic goals, and provide a framework for making decisions  according to the economic conditions. It’s also important to consider your industry when crafting a policy. 

Effective working capital management ensures a steady and reliable cash flow, allowing organizations to maintain liquidity for operational needs and unforeseen expenses.

Industry-specific differences in working capital management

Working capital needs vary dramatically across industries. Understanding the nuances will help inform the appropriate strategy. Here’s a quick overview of what this looks like.

Inventory-intensive industries

Sectors like manufacturing and retail require significant investments in inventory. For instance, a retail chain must manage seasonal inventory fluctuations to avoid overstocks or shortages. Companies like Zara manage working capital by using short lead times and adjusting stock based on consumer trends.

Service-oriented businesses

On the other hand, service-based industries, such as consulting or software development, often operate with minimal inventory and focus on receivables management. These companies rely more heavily on cash flow forecasting and timely client payments to ensure liquidity.

Example case study 

Take Apple Inc., which operates in technology manufacturing. By maintaining tight control over inventory and negotiating favorable terms with suppliers, Apple achieves an enviable cash conversion cycle. This approach frees up capital for innovation and investment. After factoring in the industry, you can narrow down a strategic direction for working capital management. 

Three approaches to working capital management

Every business falls into one of three broad categories for working capital management strategies: an aggressive approach, conservative approach, and moderate approach. Each serves different business objectives.

1. Aggressive approach

An aggressive working capital management approach minimizes investment in current assets—like cash reserves and inventory—to maximize profitability.

Key Features:

  1. Focuses more on profitability than liquidity and prioritizes higher returns by minimizing the amount of capital tied up in current assets. This strategy may expose the business to liquidity risks during unexpected financial demands or market fluctuations.
  2. Relies heavily on short-term financing. Businesses often fund operations and investments using short-term credit such as trade credit or short-term loans. While this can reduce financing costs in the short term, it increases the risk of solvency issues if liabilities aren’t met. 
  3. Maintains lean inventory and minimal cash reserves. By keeping inventory levels low and holding only essential cash, the aggressive approach reduces costs associated with carrying excess assets. However, this can result in challenges when meeting sudden spikes in demand or managing unforeseen expenses. 

Pros:

  • Higher returns due to a reduced need for carrying costs, minimizing inventory and cash reserves. Resources can be reinvested into high-growth opportunities such as research and development, market expansion, or employee training. 

Cons:

  • Increased risk of liquidity crises in economic downturns means the organization may find it challenging to cover operational expenses and meet short-term obligations. 
  • Dependency on short-term financing exposes the business to higher costs and volatility,disrupting funding and creating financial instability. 

Example:

Tech startups often adopt this approach. Their focus on scaling rapidly with tight operational budgets means holding minimal cash reserves while aiming for high profitability.

2. Conservative approach

A conservative working capital management approach prioritizes financial security by maintaining liquid asset reserves and offering extended credit terms.

Key Features:

  1. High investment in cash, receivables, and inventory provides sufficient liquidity to meet short-term obligations and unexpected expenses. This approach prioritizes stability and provides a buffer against market fluctuations, though it may result in lower returns due to idle assets. Companies adopting this strategy often accept reduced operational efficiency in exchange for enhanced financial security.
  2. Lengthier accounts payable cycles allow businesses to retain cash for a longer period, improving short-term liquidity and operational flexibility. This can reduce strain on cash flow and provide more time to allocate resources strategically. However, it may impact supplier relationships if vendors find delayed payments risky or unfavorable.

Pros:

  • Decreased risks of liquidity shortfalls as businesses retain cash on hand longer, enabling them to meet unexpected expenses or operational demands without requiring external financing. 
  • Higher capacity to weather financial downturns by preserving internal resources that can be utilized to maintain operations or adjust to market shifts. 

Cons

  • Lower returns due to inefficient use of assets. When businesses hold onto excess cash or other underutilized resources, they can’t seize opportunities to generate higher profits through strategic reinvestment or expansion. 
  • Growth may be slower due to conservative reinvestment strategies. While this approach prioritizes stability, it can hinder long-term scalability and profitability.

Example:

Large, mature corporations like pharmaceutical companies often implement this approach, ensuring steady performance even in volatile markets.

3. Moderate approach

The moderate or balanced approach blends aggressive and conservative strategies to attain liquidity and profitability.

Key Features:

  • Balances current assets and liabilities to maintain operational efficiency while ensuring financial stability. By carefully managing the ratio of assets to liabilities, this approach minimizes cash flow and over-leveraging risks. It is particularly useful for businesses seeking sustainable growth in dynamic markets.
  • Avoids extremes in inventory or receivables management, ensuring neither excess inventory nor delayed receivables compromise the business. This method prevents unnecessary holding costs while promoting timely cash inflows, fostering a stable financial cycle that supports consistent operations.

Pros:

  • Maintains steady cash flow without much risk exposure. The moderate approach allows businesses to meet their obligations promptly while avoiding unnecessary borrowing or liquidity issues. 
  • Adequately supports growth and operational stability. This balance between controlled risk and sustainable growth equips businesses to scale in fluctuating markets. 

Cons:

  • May not deliver maximum returns in the short term compared to aggressive strategies. 

Example:

Well-established retail giants such as Walmart use this strategy to maintain liquidity while continuing to reinvest in growth opportunities.

Choosing the right approach for your business

When deciding on a working capital management approach, you may want to consider several factors:

  • Business size and growth stage:

Startups often benefit from aggressive strategies because they require more flexibility and quick access to capital to fuel rapid growth and innovation. On the other hand, mid-sized businesses and corporations tend to prefer moderate or conservative approaches that provide stability and sustain long-term operations. Each strategy must align with the business's specific financial needs and growth objectives.

  • Economic conditions:

Volatile markets may necessitate a shift to conservative financial policies, as protecting liquidity becomes crucial during periods of uncertainty and economic instability. These measures help businesses mitigate risks and maintain operational continuity. Conversely, in steady or growing markets, businesses might adopt a more aggressive financial approach, seizing opportunities for expansion and higher returns.

  • Industry norms:

Companies operating in competitive, inventory-heavy industries often adopt strategies designed to prioritize flexibility in their operations. This flexibility allows them to adapt swiftly to changing market conditions, such as shifts in consumer demand or supply chain disruptions. By focusing on adaptability, these businesses can maintain a competitive edge and ensure smoother operational workflows.

  • Management’s risk appetite:

The level of risk that management is willing to accept directly influences the company’s strategic decisions and operational priorities. A higher risk appetite often leads to aggressive growth strategies, innovative projects, or investments in untested markets. Conversely, a more conservative risk approach typically emphasizes stability, cost control, and incremental progress to safeguard resources and minimize exposure to potential losses.

Over time, companies can also evolve their strategies to match their growth trajectory. A small retail start-up might shift from aggressive to moderate as it scales while keeping liquidity stable.

Align your working capital strategy with your business goals

Effective working capital management is not one-size-fits-all. Each business must tailor its approach to align with industry requirements, growth plans, and risk tolerance. The right strategy enables financial stability, supports operational efficiency, and positions the company for long-term success.

At the end of the day, the key takeaway is this: Evaluate, optimize, and evolve your working capital strategy continuously to keep pace with your business objectives and market conditions.

Panax helps companies to optimize liquidity and reduce cash risks

Panax provides an AI-driven cash management platform that helps lean finance and treasury teams with complex treasury needs. Within Panax, finance professionals get full visibility and control over everywhere their cash is, and the platform helps surface insights for optimizing liquidity, as well as alerts and policies to reduce cash risks. The Panax platform provides the flexibility to support your company’s working capital strategy, and to change it easily, based on your business needs. 

Get in contact today to see how Panax can transform your cash management.

8
Working Capital
What is working capital management?

Working capital is the difference between a company’s current assets (e.g., cash, inventory, accounts receivable) and current liabilities (e.g., accounts payable, short-term loans).

The formula is simple:

Working Capital = Current Assets – Current Liabilities

Working capital management is the process of managing these resources to meet short-term obligations and remain operational.

Simple Example:

Imagine a small retail business. Their inventory (current asset) is worth $50,000, while their accounts payable (current liability) sits at $30,000. Their working capital is $20,000. If they poorly manage accounts payable or overstock their inventory, they risk liquidity issues that could jeopardize daily operations.

Why businesses need to manage working capital effectively

Proper working capital management ensures financial stability. It’s a balancing act—too much working capital may suggest inefficiency, while too little can lead to liquidity crises. Effective management provides the flexibility to meet immediate financial obligations and invest in growth opportunities.

The link to cash flow optimization

Working capital management is inextricably tied to cash flow. By optimizing accounts receivable, accounts payable, and inventory, businesses can accelerate their cash conversion cycle (CCC)—the time it takes to convert investments in inventory into cash received from customers. Essentially, a shorter CCC means smoother cash flow.

Impact on profitability and liquidity

  • Profitability improves as funds tied up in working capital can be reinvested into high-ROI opportunities.
  • Liquidity reduces the risk of insolvency, ensuring the company can cover its short-term liabilities.

How it works

  1. Monitor assets and liabilities: track cash, accounts receivable, inventory, and accounts payable. 
  2. Analyze ratios: use ratio analysis to measure working capital management effectiveness.
  3.  Make decisions: use the information to make decisions about short-term spending and debt. 
  4. Improve processes: use software to automate processes like invoicing and payments. 

Types of working capital

To create financial strategies tailored to your business, it’s critical to understand the different forms of working capital:

  1. Permanent working capital 

Permanent working capital is funds that are consistently required to support basic operational needs (e.g., maintaining inventory). These funds remain constant irrespective of fluctuations in business activity levels and are vital for sustaining long-term operations. Properly managing permanent working capital ensures the business operates smoothly even during periods of economic uncertainty.

  1. Regular working capital 

These are funds needed to cover routine operational expenses in running a business. Regular working capital is critical to maintaining liquidity and meeting short-term obligations without disruption.

  1. Reserve working capital 

Reserve working capital is funds set aside to address unexpected expenses or financial contingencies due to unforeseen circumstances. Maintaining adequate reserve working capital safeguards the business against potential disruptions and assures operational stability under challenging conditions.

  1. Fluctuating working capital 

Fluctuating working capital requires careful planning and monitoring to effectively allocate resources during peak and off-peak periods. Proactively managing these variations helps prevent cash flow issues and supports business operations.

  1. Gross working capital 

Gross working capital refers to the total current assets available within a business, including cash, accounts receivable, inventory, and other liquid assets. By effectively managing gross working capital, the organization has sufficient resources to meet short-term obligations while enabling smooth operational processes.

  1. Net working capital 

Net working capital is the difference between a company's current assets and current liabilities, which indicates financial health. Maintaining positive net working capital is essential for meeting short-term liabilities and supporting day-to-day operations.

5 Key components of working capital

To streamline working capital management, businesses usually focus on the following  critical elements:

  1. Current assets

Current assets encompass resources a company can convert into cash within a short period, typically a year. These assets include i) cash and cash equivalents ii) accounts receivable, inventory, and iii) short-term investments. Managing current assets is crucial for maintaining liquidity while covering immediate financial needs. These resources allow businesses to manage operations seamlessly, respond to market demands, and support growth opportunities. Proper oversight and optimization of current assets directly contribute to a strong financial position. 

  1. Current liabilities

Current liabilities include i) accounts payable and ii) short-term loans, which represent the company's immediate financial responsibilities. Accounts payable refers to amounts owed to suppliers or vendors for goods and services already received, while short-term loans typically involve borrowed funds that must be repaid within a year. Correctly managing these liabilities is essential to maintaining the organization's financial health and smooth daily operations.

  1. Net working capital formula

Net Working Capital = Current Assets - Current Liabilities

Net working capital is a critical measure of a company's short-term financial health, operational efficiency, and liquidity. A positive net working capital means that the company has enough current assets to cover its current liabilities, meet financial obligations, and invest in growth opportunities. On the other hand, a negative figure could mean potential liquidity issues and necessitate immediate attention to protect the business’s stability.

What should be excluded from working capital?

Items that aren’t part of a company’s short-term assets or liabilities are not part of working capital and include: fixed assets (e.g. real estate and equipment that can’t be converted into cash within a year, long-term debt and lease obligations that go beyond a year, retained earnings or common stock, and patents and trademarks).


Benefits of effective working capital management

Why should organizations prioritize working capital management? Read on for the key benefits: 

Improved cash flow & liquidity 

Effective working capital management ensures a steady and reliable cash flow, allowing organizations to maintain liquidity for operational needs and unforeseen expenses. By optimizing receivables, payables, and inventory levels, companies can reduce financial strain and avoid costly short-term borrowing. This proactive approach not only supports day-to-day operations but also provides flexibility to take advantage of strategic investment opportunities that power long-term growth and stability.

Better risk management 

Effective risk management is critical for mitigating financial uncertainties and safeguarding organizational stability. By analyzing potential threats and implementing robust contingency plans, companies can minimize the impact of adverse events on their operations. Proactive identification and evaluation of risks allow businesses to allocate resources strategically, reducing exposure to volatility.

This structured approach enhances decision-making processes and promotes resilience, ensuring sustained performance even in challenging market conditions.

Enhanced operational efficiency 

Streamlining processes, optimizing resource utilization, and reducing redundancies across the organization enhance your operations, improve productivity, and create better outcomes.Through working capital management, your business can create clear workflows and continuously monitor performance to align operations with strategic goals. This not only drives cost-effectiveness but also allows the company to quickly adapt to market demands for long-term success.

Stronger supplier & customer relationships 

Maintaining liquidity to meet its short-term obligations via working capital management means you’re making timely payments and fostering trust with suppliers. This reliability strengthens partnerships, leading to better negotiation terms and consistent supply chains. Similarly, optimized working capital enables businesses to offer favorable payment terms to customers, enhancing satisfaction and loyalty.

By balancing cash flow, businesses can create mutually beneficial relationships that support long-term growth and collaboration.

Challenges in managing working capital

While the benefits are clear, managing working capital is not without challenges:

  1. Cash flow constraints 

Insufficient liquidity can lead to missed growth opportunities or delayed payments. Businesses often struggle to balance incoming and outgoing cash, particularly when dealing with fluctuating sales cycles or unexpected expenses. Additionally, relying on credit or slow-paying customers can exacerbate these constraints, straining operational efficiency.

  1. Over-reliance on credit 

Excessive dependence on short-term financing can lead to high-interest costs. This can reduce financial flexibility and leave your businesses vulnerable during low revenue periods. Furthermore, it can create a cycle of dependency that hinders long-term growth and hampers the ability to invest in strategic initiatives.

  1. Inventory management issues 

Poor inventory management disrupts cash flow, as excess inventory leads to increased holding costs, while insufficient stock can damage customer relationships and diminish brand reputation. Balancing inventory levels is critical to ensure liquidity and maintain operational stability. 

  1. Accounts receivable delays 

Late payments from customers hinder cash flow and operational agility. These delays reduce the funds needed for day-to-day operations and strategic investments. Prolonged payment cycles may also increase reliance on external financing, raising borrowing costs and financial risk.

Strategies for working capital management

To overcome these challenges, CFOs and treasurers can adopt some of the following strategies:

  1. Cash flow forecasting & budgeting 

Anticipate future cash needs to avoid shortfalls or surpluses. Tools like cash flow software can streamline projections. Regularly updating cash flow forecasts to align with changing market conditions and organizational priorities, for better decision-making. 

  1. Inventory control techniques 

Implement just-in-time (JIT) or ABC analysis to maintain optimal inventory levels. These methods minimize holding costs and reduce the risk of obsolescence while ensuring that stock levels meet demand. Regular inventory audits and leveraging software solutions can further enhance efficiency and accuracy in inventory management.

  1. Streamlining accounts receivable & payable 

Encouraging faster customer payments by offering early payment discounts, which improve cash flow and reduce outstanding receivables. Additionally, negotiating extended payment terms with suppliers gives you more financial flexibility and improved management of accounts payable.

  1. Leverage financial tools & technology 

Use automated solutions like supply chain finance platforms and electronic invoicing to improve efficiency. These tools streamline payment processes, reduce errors, and provide real-time insights into cash flow, fostering more informed decision-making.

Differences between related concepts

Lastly, it’s crucial to disentangle working capital management from related concepts:

Working capital vs. cash management 

Working capital compares current assets to current liabilities to understand whether the finance team can pay bills and other short-term liabilities. Cash flow measures the cash inflows and cash outflows, as shown in the cash flow statement. 

Working capital vs. capital budgeting 

Capital budgeting focuses on long-term strategic investments, while working capital management is concerned with the short-term, operational aspects of managing a company's current assets and liabilities.

Take control of your working capital today

Working capital management isn’t just a financial principle—it’s the backbone of operational efficiency and business growth. For CFOs, VPs of Finance, Controllers, and Treasurers, understanding and implementing these strategies is vital for maintaining liquidity, optimizing cash flow, and securing a competitive edge.

Find gaps in your working capital strategy? Prioritize stronger relationships with suppliers, streamline receivables, and harness the power of automation to elevate your game. A balanced working capital approach today can fuel unprecedented growth tomorrow.

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