5 min

How to run accounts receivable reconciliation

Author
Naomi Goldberg
Published
Nov 17
, 
2024

Key Takeaways:

  1. Accounts receivable reconciliation involves comparing outstanding invoices with received payments to ensure the accuracy of financial records.
  2. The process includes identifying discrepancies, verifying payment details, and resolving issues such as late or partial payments.
  3. Manual reconciliation is time-consuming and prone to errors, underscoring the importance of adopting tools that automate the process for greater efficiency.
  4. Using automated reconciliation tools reduces administrative burdens, enhances accuracy, and provides real-time visibility into receivables, enabling faster decision-making and improved cash flow management.

Maintaining a healthy cash flow is essential for any company. To achieve this, finance managers must master accounts receivable reconciliation (ARR)—matching the figures of unpaid customer billings to the accounts receivable total reported in the general ledger. With ARR, also known as Cash Application, your business can produce accurate financial reporting, enhance cash management, and make informed strategic decisions.ARR also helps businesses with:

  • Error detection
  • Fraud prevention
  • Customer relations  
  • Audit readiness 

Here’s how to execute accounts receivable reconciliation. 

Step-by-Step Accounts Receivable Reconciliation Process

Step 1: Gather Necessary Records

Begin by collecting all relevant financial records (e.g. customer invoices, payment records, credit notes, and bank statements).  During the collection stage, we suggest storing records systematically, whether digitally or in physical files, for quick access.

It's also good practice to categorize your records by customer or time period. This lends a more streamlined reconciliation process, and reduces the likelihood of overlooking important data. Modern accounting software can further simplify this task with automated record-keeping and easy retrieval.

Step 2: Compare Customer Payments with Invoices

Next, compare customer payments with issued invoices to identify mismatches between what customers owe and what they have paid.  Match each payment with its corresponding invoice, aligning the amounts with the dates. 

During this stage, you might encounter discrepancies such as partial payments, overpayments, or missing payments. Highlight or note these so you know what to investigate later on. Whichever method you use to flag variances,  using a consistent method makes the reconciliation process easier and ensures it’s up to date. 

Step 3. Reconcile Ageing Reports

Next, reconcile the accounts receivable aging reports, matching the periods up with the outstanding balances. You’ll first review the aging report, which categorizes receivables based on how long they have been outstanding. Verify that the totals on the aging report match the general ledger’s accounts receivable balance. You may notice discrepancies due to transactions not recorded or categorized in earlier steps—this will require further investigation and adjustments. In this stage, you’ll also flag overdue accounts that need follow-up or corrective actions.

Adjustments or write-offs may be necessary for balances deemed uncollectible, requiring formal documentation and approval. The purpose of reviewing aged receivables is to shed insight into customer payment patterns and potential cash flow challenges.

Step 3: Investigate and Resolve Discrepancies

In step three, you’ll address all discrepancies. Begin by investigating the cause of each discrepancy, looking into factors such as data entry errors, incorrect invoice amounts, or communication lapses with customers. Utilize your team members’ knowledge to understand discrepancies that aren't clear from the records. You can also reach out to customers for clarification to resolve misunderstandings and facilitate payment adjustments.

Once you ascertain the causes, rectify the discrepancies by  updating records and communicating changes to stakeholders. This not only resolves immediate issues, but helps prevent similar discrepancies in future reconciliations.

Step 4: Adjust Ledger Entries

Make any necessary adjustments to your accounting records. This could be posting journal entries to correct amounts or adjusting balances in your general ledger. 

Double-check calculations and that all adjustments follow the company's financial policies and procedures. Once you’ve affirmed the adjustments, carefully document and authorize them by the appropriate personnel to maintain transparency. 

Step 5: Reconcile Regularly

The final step is regular reconciliations. Conducting regular reconciliation ensures that your accounts receivable records stay accurate, up-to-date, and reflective of your company's financial health. Establish a consistent schedule for reconciliation, whether monthly, quarterly, or as needed based on your business's transaction volume.

Regularly reviewing and reconciling accounts receivable allows you to identify potential issues early on, minimizing the risk of financial misstatements and cash flow disruptions. It also provides valuable insights into customer payment behaviors, aiding in better cash flow management and strategic planning.

By incorporating regular reconciliation into your financial processes, you maintain financial integrity and build trust with stakeholders.

Tips & Best Practices in Accounts Receivable Reconciliation

  1. Leverage Technology: Invest in ARR software that automates reconciliation tasks and provides real-time updates on payment statuses. Technology streamlines the process and reduces the likelihood of errors.
  1. Foster Collaboration: Encourage communication between your finance team and other departments involved in the reconciliation process for smoother collaboration.
  1. Prioritize Training: Provide ongoing training for your finance team to stay up-to-date with industry trends, software tools, and accounting standards.
  1. Reduce Key Personnel Dependency: Train multiple team members on reconciling accounts receivable to minimize the impact of any single person's absence.
  1. Standardize and Document Procedures: Establish consistent procedures for reconciliation, including documentation and approval processes. This ensures consistency in the process and provides a reference for future reconciliations.
  1. Regularly Review Aged Receivables: Consistently review aging reports to identify potential issues early on, such as late-paying customers or high-risk accounts.
  1. Utilize Checklists: Checklists are a valuable tool for keeping track of completed reconciliation steps, from verifying invoice details to posting adjustments. Checklists can also help to delegate responsibilities within the team.

How Automation Improves Accounts Receivable Reconciliation 

Automation can significantly organize and consolidate the accounts receivable reconciliation/ cash application process by automating manual tasks and reducing errors. Here's how it works:

Easy integrations: Effortlessly connecting all your company’s financial institutions around the globe to one centralized platform provides a real-time view of where cash is going and shows updates across all financial software. 

Automated ERP matching: Some solutions such as Panax connect to your ERP, map your general ledger to cash, and automatically categorize your inflows and outflows, making collecting relevant data painless.

Automated reporting: Auto-generated reports can answer cash-related questions quickly and shed light on discrepancies. 

Proactive messaging: Proactive alerts keep reconciliation top of mind and help you stay on track while completing the checklist. Alerts also encourage more transparency, as financial teams can notify leadership as soon as they’ve completed a task or made a change.‍‍

Master Accounts Receivable Reconciliation

Accounts receivable reconciliation is a crucial function for a finance department. By following a structured process, addressing common challenges, and implementing best practices, you can ensure an accurate ARR. Regular reconciliation not only enhances cash flow management but also supports strategic decision-making, giving your company a competitive edge in today's dynamic business landscape.

Make Accounts Receivable Reconciliation more efficient with Panax  

Panax’s Cash Application makes AR Reconciliation easy. Panax’s proactive, automated matching uses AI driven algorithms to take the workload off, but leaves you full control over the final approval. You can see all finalized matched pairs of transactions, making it easy to run a final review. All records are automatically created back in the ERP, so your books are up to date. Get in contact to find our more

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Cash Application
What is accounts receivable reconciliation?

Accounts receivable reconciliation, also known as cash application, is when you match outstanding customer invoices with the money received. This process ensures all payments are recorded and accounted for correctly in the company’s books. Reconciliation is essential for keeping accurate financial records and to correctly assess and manage cash flow.

Why is AR Reconciliation Important?

Conducting accounts receivable (AR) reconciliation provides accurate and reliable financial records by matching invoices with payments. This helps finance teams identify and address any discrepancies, stay compliant with financial reporting standards, and give stakeholders a transparent view of the company’s financial position.

AR reconciliation also enhances cash flow management by showing outstanding receivables and allowing finance leadership to address late payments and alter their collections processes.

On a strategic level, AR reconciliation gives business executives the tools to make more informed decisions about credit policies, customer relationships, and risk management, all of which allow the organization to meet profit goals.

General Ledger, Sub-Ledgers & Double-Entry Bookkeeping

There are three elements involved in recording accounts receivable: the general ledger, sub-ledgers, and double-entry bookkeeping. 

The general ledger is the central record that lists an organization's financial data and all transactional information.. 

Sub-ledgers are records of individual transactions that allow accountants to manage and reconcile specific entries or specific customer accounts.

Double-entry bookkeeping utilizes both general ledgers and sub-ledgers so that each transaction is recorded in at least two accounts. Having two records of transactions makes it easier to spot missing or incorrect data and quickly address the issue.  With double-entry bookkeeping, accountants keep meticulous financial records that protect them from everything from fraud to noncompliance.  

Step-by-Step Guide to Performing Accounts Receivable Reconciliation

Here’s a breakdown of how accounts receivable reconciliation works:

  1. Collect all relevant data:  Gather documents such as customer invoices, payment receipts, bank statements, and any other relevant financial records. Verify that these documents are correct and up to date.
  2. Review the accounts receivable ledger: Examine the accounts receivable ledger for outstanding balances. Then, check this information against customer account statements to ensure all recorded transactions are accurate and complete.
  3. Compare invoices to payments received: Match each customer invoice with bank statement payments. Flag instances where payments were incorrectly allocated or missing.
  4. Identify and investigate discrepancies: Analyze any inconsistencies between invoices and receipts. This may involve looking at invoice numbers, dates, and amounts. Reach out to customers or financial institutions to resolve any issues. 
  5. Adjust and rectify records: Tweak your records to reconcile issues by correcting errors in data entry, updating transaction dates, or reassigning payments to the correct accounts.
  6. Document the reconciliation process: Maintain detailed documentation of the reconciliation process, noting discrepancies and how you resolved them. Keep all records on hand in case of audits or future reconciliation activities.
  7. Review and approve: After making adjustments, conduct a final review of the reconciled accounts, reviewing your work.. Submit the reconciliation for approval with the relevant company executive to validate the financial statements.

Challenges in Accounts Receivable Reconciliation

While accounts receivable reconciliation is crucial for financial accuracy, it does come with challenges, such as:

  • Inefficient processes: Manual account reconciliation is time-consuming, especially for businesses with large transaction volumes. 
  • Data entry errors: Accounting for high volumes of transactions, which can lead to data entry errors or missed entries. 
  • No standardization: Manual methods usually don’t have a standard reconciliation process for every department, leading to inconsistencies and errors. 
  • Risk issues: By only looking at matching the fields and ignoring patterns in the data, businesses can miss potential fraud.
  • Lack of visibility: Dealing with huge volumes of data makes it more difficult to track all the changes made in the reconciliation process, especially with multiple stakeholders. Lack of visibility and accountability can result in disconnected spreadsheets, more bottlenecks, and potential errors.  
  • Different payment terms: Differing customer payment terms and methods can complicate the reconciliation process.

Tips for Smooth AR Reconciliation 

Consider implementing the following tips for a smooth and efficient AR reconciliation process. 

  1. Use a checklist that outlines all the steps and data required for the reconciliation process. This ensures consistency in every cycle and within every department. 
  2. Coordinate with all relevant team members to ensure they understand their roles in the reconciliation process.
  3. Strategically time reconciliations with your business cycle and financial reporting requirements for timely insights.
  4. Use advanced software that can show reconciliation data in an intuitive way to help identify patterns or anomalies that may not be obvious in traditional spreadsheet formats.
  5. Use the insights from resolving discrepancies to optimize your reconciliation processes and business practices. This could mean updating reconciliation checklists, improving data collection methods, or fixing communication issues among team members.

When to Perform Accounts Receivable Reconciliation

Typically, companies perform monthly reconciliations as part of the closing process. When to perform AR reconciliation can also depend on factors such as significant changes in monthly sales volume, or a large influx of payments. In these situations, a more frequent reconciliation schedule might be more advantageous.

For the most accurate and compliant records, you may want to prioritize AR reconciliation during audits, or when preparing for tax filings. Strategically timing these activities will help you quickly flag and correct inaccuracies, improving operations and financial transparency.

Smart, Ai driven AR Reconciliation

Panax automates AR Reconciliation, so lean finance teams with complex treasury needs can work more efficiently, and with less data errors. Panax’s proactive, automated matching cash application uses AI driven algorithms to take the workload off, but leaves you full control over the final approval. The matched transactions in Panax are automatically created back into the ERP, so your books are up to date. 

To get a personalized demo of AR Reconciliation within Panax, click here. 

Naomi Goldberg
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Cash Forecasting
How to forecast cash flow

When it comes to running a business, forecasting cash flow is an essential practice. Cash flow forecasting involves predicting the amount of money that will flow in and out of your business over a specific period. By mastering cash flow forecasting, you can better predict future cash positions, avoid potential shortages, and effectively utilize surpluses, ensuring smooth financial operations for your business. This allows you to anticipate any potential shortfalls and plan accordingly. 

In this article, you’ll learn steps and practical tips for forecasting cash flow accurately using Excel. Let’s dive in.

The importance of managing cash flow

Understanding and managing cash flow is crucial  for several reasons, as it:

‍Ensures Liquidity: A cash flow forecast helps ensure you have enough cash on hand to meet your obligations like payroll, supplier payments, and other operational expenses.

Supports Decision Making: Accurate forecasting allows you to make strategic decisions about investments, expansions, or cost-cutting measures.

Avoids Surprises: By predicting cash flow, you can avoid unexpected shortfalls that could harm your business operations.

Builds Confidence: Providing clear cash flow projections can build confidence among investors and lenders, demonstrating that your business is well-managed and sustainable.


A good cash flow forecast acts like a financial weather report for your business, helping you prepare for sunny days and navigate through storms

‍

Step-by-Step Guide to Creating a Cash Flow Forecast

Creating a cash flow forecast might seem daunting, but breaking it down into manageable steps makes it easier to handle. To help you get started, we've outlined a simple, step-by-step guide to forecast your cash flow. 

1. Determine the Forecasting Period

‍Decide whether you want a weekly, monthly, 13 week or 1 year forecast. A shorter period (e.g. weekly) provides more precision for immediate decisions, while longer periods (e.g. quarterly) are better for strategic planning.

2. Choose Between Direct and Indirect Methods‍

For short-term accuracy, use direct forecasting by tracking cash receipts and payments. For longer-term, strategic forecasting, use the indirect method, which leverages financial statements like income statements and balance sheets.

3. Forecast Your Income or Sales 

‍Begin by deciding which period you want to cover, whether it's weekly, monthly, or quarterly. Look at past sales data to identify trends and make educated guesses about future sales. For new businesses, estimate your sales based on market research and potential customer base. 

4. Estimate Cash Inflows 

Consider other potential sources of cash inflows beyond sales. This includes loans, asset sales, GST rebates, or additional investments from owners. Adding these to your forecast provides a complete picture of incoming cash. 

5. Estimate Cash Outflows and Expenses

List all expected cash outflows, such as the costs required to make goods available, operational expenses, salaries, rent, utilities, and any other regular business expenses. Don't forget to include irregular expenses, like annual subscriptions or one-off purchases. 

Subtract the net outgoings from the net income for each period to determine your cash flow, which can be either positive or negative.

6. Create a Running Total

Next, you'll want to maintain a running total over time. This involves keeping a cumulative account of your cash flow. Essentially, at the end of each period, you will add or subtract your net cash flow from the previous period’s closing balance. 

How to Create a Cash Forecast with Excel

Excel is a powerful tool for creating cash flow forecasts, thanks to its versatile functionalities. Here are some key functions and features that will help you build an accurate, effective cash flow forecast: 

SUM Function: Use this to aggregate your cash inflows and outflows, providing a quick total for specific periods.

IF Function: This helps create conditional scenarios. For example, if a certain condition is met, a specific outcome is displayed.
‍
VLOOKUP/HLOOKUP: These functions are useful for retrieving data from different tables or sheets, allowing for dynamic references and more streamlined calculations.
‍
CHARTS: Visual representations such as bar charts or line graphs can help you identify trends in your cash flow over time, leading to better decision-making.
‍
DATE : Functions like EDATE and EOMONTH are useful for handling date-specific calculations, increasing timing accuracy in your forecasts.
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DATA VALIDATION: Use this feature to restrict the type of data or values you can enter in a cell, ensuring that your cash flow model remains consistent and error-free.
‍
PIVOT TABLES: Simplify large datasets by summarizing your cash flow data, making it easier to analyze and interpret your financial information.
‍
CONDITIONAL FORMATTING: Highlight specific cells based on conditions (such as cash inflow less than a threshold), making it easy to identify potential issues.
‍
GOAL SEEK: This feature can help you determine the necessary input values to achieve a specific financial goal, such as a targeted ending cash balance.

By leveraging these Excel functions and features, you can create a comprehensive and reliable cash flow forecast tailored to your business needs.

Limitations of Using Excel in Cash Forecasting

Although many businesses use Excel in their cash management because of its accessibility and flexibility, it presents a number of limitations, including: 
‍
‍Manual Data Entry that’s prone to human error: Entering data manually into Excel is not only time-consuming but also prone to human error. This can compromise the accuracy of your cash flow forecasts.

‍Lack of Automation: Excel lacks built-in automation features, making it difficult to update and sync your data efficiently without extensive manual effort.

‍Difficulty scaling as the business grows: As your business grows, managing larger datasets and complex financial models in Excel becomes increasingly cumbersome, hindering scalability.

‍Limited Reporting: Creating customized and dynamic reports in Excel can be challenging, often requiring advanced knowledge of formulas and pivot tables.

‍No Real-Time Collaboration: Excel does not facilitate real-time collaboration, making it hard for multiple team members to work on the same cash flow forecast simultaneously.
‍

‍‍5 Tips to Improve Your Cash Flow Forecasting

Accurate cash flow forecasting isn’t just about crunching numbers. It’s about understanding the ebbs and flows of your business and utilizing key strategies to anticipate future financial needs. Here are five essential tips that can enhance your cash flow forecasting: 
‍
Regularly Update Your Forecast

Cash flow forecast is not a set-it-and-forget-it document. Revisit and revise your forecast frequently to reflect any changes in income, expenses, or external economic factors. The more current your forecast, the more reliable your financial planning will be.

Use Historical Data Wisely

Employ past financial data to identify trends and patterns in your cash flow. This historical perspective can inform more accurate projections. However, remember that past performance isn’t always indicative of future results, so consider any anticipated changes in market conditions, seasonal fluctuations, and business growth.
‍
Incorporate Multiple Scenarios

Plan for the best, worst, and most likely financial scenarios. This approach helps you prepare for unexpected changes and develop contingency plans. By modeling different outcomes, you can better navigate through uncertainties.
‍
Monitor Key Metrics

Keep an eye on critical financial metrics like accounts receivable turnover, inventory turnover, and accounts payable days. These metrics can offer insights into your cash flow health and highlight areas where you might need to adjust your strategy.
‍
Communicate with Stakeholders

Effective cash flow management like cash flow monitoring often involves multiple departments and stakeholders. Maintain open communication with your finance team, suppliers, and customers. Their input can provide valuable insights and help you make more informed decisions.

Improving your cash flow forecasting is an ongoing process that requires diligence and adaptability. By following these tips, you can create a more accurate and responsive forecast, ensuring your business stays financially healthy and prepared for the future.

Done Right, A Cash Forecast Can Be One of Your Most Impactful Tools

Mastering the art of cash flow forecasting is crucial for every business, regardless of its size or industry. Ultimately, a well-prepared cash flow forecast is not just a chart filled with numbers—it's a strategic system that empowers you to navigate the financial future of your business confidently.

While Excel is a powerful tool, it has its limitations, especially when it comes to managing and updating extensive cash flow data. This is where cloud-based solutions with real-time, cash account updates come in. These solutions provide more dynamic, user-friendly, and automated features to enhance your forecasting accuracy and efficiency. 

With Panax, you can revolutionize your cash flow forecasting by leveraging powerful features such as: 

Real-time Updates: Unlike static Excel sheets, Panax offers real-time data synchronization, ensuring your forecasts are always up-to-date.
Automation: Automate repetitive tasks and reduce manual errors with intelligent automation features, saving you valuable time.
Advanced Analytics: Gain deeper insights into your cash position with powerful analytics and visual dashboards that Excel simply can't match.
Scenario Planning: Easily create and compare multiple scenarios to prepare your business for various financial situations.
Accessibility: Access your cash flow forecasts from anywhere, anytime, with cloud-based storage and security.

By incorporating Panax into your financial toolkit, you're not just overcoming Excel's limitations; you're setting a new standard for your business's financial health, ensuring you're always a step ahead in your cash flow management.
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Contact us today to see how Panax can take your cash fore forecasting forward.

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Naomi Goldberg
10 min
Cash Forecasting
12-Month cash flow forecast explained

A 12-month cash flow forecast is a financial tool businesses use to project their cash inflows and outflows over the course of a year (ie,how high its income and expenses during the year).This forecast helps companies anticipate future cash movements, reduce financial risks and create financial long term financial plans. 

For example, a 12-month rolling forecast could be January through December 2025. When January 2026’s results are finalized, you could replace it with January 2027. The forecast encompasses 12 months, but slides forward every month.

Why is a 12-month cash forecast important for businesses?

While shorter time frames such as a 13-week cash flow forecast or monthly updates provide valuable short term insights, a 12-month cash flow forecast provides a comprehensive view that can bolster long-term strategic planning. A 12-month forecast leaves room for seasonal fluctuations in cash inflows and outflows. Understanding these patterns allows you to strategically allocate resources, prepare for potential downswings, and capitalize on peak periods.

A year-long forecast also provides the extended visibility needed for informed capital expenditure planning and investment decisions. It gives your business the foresight to align funding strategies with projected cash availability, supporting sustainable growth and expansion.  Over a 12-month horizon, companies can predict and mitigate cash shortages, enabling operational agility and financial stability. This is especially important for companies looking at longer term, large financial events, such as mergers, acquisitions or raising capital.

A 12-month cash flow forecast provides a comprehensive view that can bolster long-term strategic planning

How does a 12-month cash flow forecast work?

Creating a 12-month cash flow forecast is actually pretty simple; Businesses must compare the expected income with the expected expenditure for each month. Then, they’ll subtract the expenses from the income, showing whether the expenses exceeds the income or if the month ended in a surplus or deficit.

In order to make those calculations, you must gather historical data (e.g. all revenue and expenses). To make these types of forecasts more accurate, companies may pull their ERP data from the last year.

Revenue might include:

  • Customer payments
  • Cash sales
  • Subsidies and other funding
  • Tax refunds 
  • Income from financial investments
  • Income from licenses or patents 

Expenditures might include:

  • Employee salaries
  • Rent for office spaces, warehouses, and/or production halls
  • Supplier payments
  • Software license fees 
  • Operating costs such as water, electricity, internet, and so on
  • Insurances 
  • Marketing costs

Typically 12-month forecasts—which include rolling updates— segment revenue and expenses into three primary components: operating activities, investing activities, and financing activities.

Operating Activities

  • Revenues: Sales revenue, service income, accounts receivable collections
  • Expenses: Salaries and wages, rent, utility bills, supplies, and accounts payable disbursements

Investing Activities

  • Revenues: Sale of fixed assets, dividends from investments
  • Expenses: Purchase of equipment, investment in securities, capital expenditures

Financing Activities

  • Revenues: Proceeds from loans, issuance of shares or bonds
  • Expenses: Loan repayments, dividend payments, share buybacks

All three components show businesses where cash originates from and how it is utilized. A rolling 12-month forecast gives a  continuous and forward-looking view of their cash dynamics, a vital part of strategic planning and financial stability.

Three tips for creating a 12 month forecast

  1. Remember the company’s mission: Rolling forecasts tend to be more successful when it’s aligned to the company’s objectives and goals.
  2. Invest in the right tools: spreadsheets passed from department to department could lead to disjointed and error-prone documentation. Consider a flexible forecasting software that will increase accuracy and save resources.
  3. Adjust forecasts as necessary: Revisit the forecast and compare it to actual results so you can make adjustments.

How often should a cash flow forecast be updated?

Regularly updating cash flow forecasts is crucial for effective financial management. Ideally, businesses should update cash flow forecasts monthly, or even weekly to reflect the most up-to-date financial data and to accommodate any changes in market conditions or business operations. 

To control liquidity and accurately forecast, especially in uncertain economic periods, companies may even want to create several versions of their forecast. This means that they are able to compare scenarios, and accurately run scenario planning. 

This practice helps identify potential liquidity issues early so businesses can proactively  make informed financial decisions. Regular forecast updates not only track business performance, but also ensure that strategic plans align with current financial realities.

For example, if businesses see unplanned or unexplained discrepancies between forecasted and actual cash flows, they can correct them to maintain accuracy.

An Easier Way to Build 12-Month Forecasts

A 12-month cash flow forecast provides critical insight into a business’s financial health during a significant period of time, which provides enough data to better prepare for uncertainties and exercise  strategic decision-making.

Though Excel can create 12-month forecasts, the process is very manual, time-consuming and prone to human errors. Excel also doesn’t make it easy for teams to collaborate, to grant permissions to different people in different teams, or to easily share reporting. 

Panax offers an AI-driven cash management platform for lean finance teams with complex treasury needs. Panax's automation and AI makes categorizing transactions easier and quicker, and creates fuller data for forecasting. Panax offers weekly, monthly and long term forecasts based on ERP data and AI algorithms, offering flexibility to pull the relevant data into your forecast, and update it with ease. All together it makes it easy to forecast for your company, so you can optimize liquidity and work more efficiently.

Want to learn more about how Panax’s flexible forecasting can help you and your team work better? Get a demo today‍

Naomi Goldberg
5 min
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).

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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.

Naomi Goldberg
10
Cash Management
Cash flow management survey 2025: The results are in

To get more insight into the state of AI and automation in cash flow management in 2025, we commissioned a survey of 200 senior finance professionals. Its purpose is to shed light on their current methods, challenges and priorities.

This report was administered online by Global Surveyz Research, an independent global research firm. The survey is based on responses from CFOs, VPs Finance, Directors/Heads of Finance, Controllers, and Treasurers across a mix of industries including tech, E-commerce, real estate, asset- based companies, hospitality, and manufacturing.

Survey participants hailed from companies with an ARR of $50M+ and treasury departments that include 4+ people (25%), 1-3 people (25%), or no treasurers (50%), in the US, UK, DE/FR, and MEA.

What the survey found: Increasing pressure on finance teams to improve efficiency, but continued caution about adopting AI solutions 

The survey revealed that 33% of respondents faced internal operational risks, such as fraud or system breakdowns, over the past year. Additionally, 32% highlighted regulatory constraints, while 27% cited debt obligations with near-term maturities as significant challenges. This convergence of internal and external pressures is compelling organizations to rethink their approach to cash flow management.

To stay resilient, finance teams are focusing on achieving real-time visibility and implementing proactive measures to mitigate risks before they escalate.

According to the survey, areas such as audit and compliance, expense management, transaction categorization, and cash flow forecasting were rated equally as high priorities for AI implementation. These technologies are streamlining traditionally labor-intensive processes, enhancing accuracy, and freeing up valuable resources.

Larger enterprises, in particular, find AI indispensable, as its ability to process vast transaction volumes reduces the burden on finance teams and allows them to focus on strategic decision-making.

The adoption of AI is not without its challenges. Concerns around cost, regulatory compliance, and data reliability remain top of mind for many finance teams. However, the benefits of automation—from error reduction to improved forecasting capabilities—are undeniable. By investing in scalable, AI-driven solutions and prioritizing data quality, companies can future-proof their operations and ensure they are prepared to navigate an increasingly complex financial landscape.

As the 2025 survey highlights, embracing innovation is no longer optional for finance teams. By leveraging AI to overcome liquidity challenges and optimize operations, organizations can transform their cash flow management processes and secure a competitive edge in an era of rapid change. 

Download the full survey report here. 

Naomi Goldberg
5
Cash Management
What controllers need to know about treasury management in pre-treasury teams

At growing companies, or companies with lean finance teams without a dedicated treasury function, controllers often find themselves wearing multiple hats. Without a dedicated treasury team, the responsibility of treasury management often falls on their shoulders. This expanded role requires controllers to not only excel in traditional financial functions but also to master the complexities of managing liquidity, mitigating risks, and ensuring financial stability.

Here’s what controllers in lean pre-treasury teams need to know about taking ownership of treasury management:

Juggling complex treasury operations, with lean resources

Without a dedicated treasury team, controllers must take charge of several critical treasury functions:

  • Cash Management: Ensuring the organization has sufficient liquidity to meet short-term obligations while avoiding excessive idle cash. This involves cash flow forecasting, tracking accounts receivable and payable, and optimizing cash reserves.
  • Risk Management: Identifying and addressing financial risks, including currency fluctuations, interest rate changes, and credit risks. Controllers may need to implement basic hedging strategies and stay vigilant about market trends.
  • Debt Management: Managing loans, credit lines, and other forms of debt effectively, balancing costs and flexibility while ensuring compliance with loan covenants.
  • Investment Management: Making decisions about surplus funds to maximize returns while maintaining liquidity and mitigating risks.

Understanding and taking ownership of these functions empowers controllers to ensure the organization’s financial health in the absence of a treasury team.

Prioritizing cash flow visibility

For controllers handling treasury responsibilities, cash flow visibility is paramount. Accurate, real-time insights into cash positions enable controllers to:

  • Identify and address liquidity gaps.
  • Plan for short-term financing needs.
  • Optimize working capital.

Leveraging tools like cash management systems and enterprise resource planning (ERP) software can provide controllers with a consolidated view of cash across accounts, currencies, and business units. This visibility is crucial for effective decision-making.

Utilizing technology as a resource to work more efficiently

Controllers in lean teams must rely on technology to handle treasury tasks efficiently. Key tools and innovations include:

  • Treasury Management Systems (TMS): Automating processes like cash forecasting, payment approvals, and risk assessments to reduce manual work and enhance accuracy.
  • Robotic Process Automation (RPA): Streamlining repetitive tasks such as bank reconciliations and cash position reporting.
  • Artificial Intelligence (AI) and Machine Learning (ML): Using AI and ML for predictive cash flow analysis, fraud detection, and scenario modeling.

These technologies not only save time but also help controllers manage treasury responsibilities effectively, even in lean setups.

Mitigating financial risks without dedicated resources

Managing risks becomes more challenging without a dedicated team, but controllers can still establish effective practices:

  • Develop straightforward policies for managing foreign exchange and interest rate risks.
  • Stay informed about regulatory requirements to ensure compliance.
  • Utilize basic hedging techniques or financial products to mitigate risks where appropriate.

Controllers should also focus on regular reporting and analysis to monitor risk exposure and adjust strategies as needed.

Collaborating across functions

In lean organizations, collaboration is essential. Controllers must:

  • Work closely with finance and operations teams to gather relevant data.
  • Align treasury responsibilities with broader financial goals.
  • Communicate regularly with executive leadership to ensure transparency and alignment.

Collaboration helps bridge resource gaps and ensures that treasury management is integrated into the overall financial strategy.

Ensuring regulatory compliance and strong governance

Even in lean teams, compliance cannot be overlooked. Controllers must:

  • Stay updated on tax regulations, financial reporting standards, and anti-money laundering (AML) requirements.
  • Implement strong internal controls to prevent fraud and errors.
  • Use technology to streamline compliance tasks and ensure accuracy.

By focusing on governance and compliance, controllers can safeguard the organization’s financial integrity.

Balancing strategic and operational roles

Controllers managing treasury functions must balance day-to-day operations with strategic planning. This includes:

  • Evaluating short-term and long-term financing options.
  • Planning for growth initiatives, such as capital investments or expansions.
  • Assessing the financial implications of key business decisions.

By adopting a strategic mindset, controllers can contribute to the organization’s financial success while managing immediate treasury needs.

Adapting to dynamic financial environments

Economic and market changes can pose significant challenges for treasury management. Controllers in lean teams must:

  • Monitor macroeconomic trends and their potential impacts.
  • Adjust strategies in response to changing interest rates, inflation, or currency fluctuations.
  • Build contingency plans to address unexpected disruptions.

Adaptability and proactive planning are crucial for navigating an ever-changing financial landscape.

Supporting controllers in pre-treasury teams to manage complex treasury operations

Panax is designed for lean teams with complex treasury needs, so it is a perfect tool for controllers who need to manage treasury. Panax utilizes automation and AI to reduce manual work and increase strategic insights, so controllers can have full visibility over all of their cash. Panax makes cash forecasting and budgeting easy, even without a dedicated team. Panax generates reports so that controllers can get a bird’s eye view of their cash situation, but also deep dive into specific entities or currencies, so they can avoid cash risks and optimize liquidity. Get a Panax demo here. 

Naomi Goldberg
10
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