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 compare 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.
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.
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