Fall 2023

While electronic commerce and supply chain management have taken center stage among the digital transformation initiatives arising from the unprecedented challenges encountered by businesses during the COVID-19 lockdowns, corporate finance automation has gained significant attention too as organizations rethink the interactions and collaborations among stakeholders along the value chain. This feature examines the state of digital cash flow management and the new technology landscape in this rapidly changing environment.

What Is Digital Cash Flow Management?

Cash is often referred to as the lifeblood of organizations, and effective cash flow management is the battleground for business resilience and sustainable growth.

Cash flow management consists of the planning and monitoring of the various finance functions that contribute to the supply and optimization of cash in the organization (i.e., cash management, working capital management,¹ cash planning and forecasting, financing, debt management, and investments and financial risk management). In this article, however, digital cash flow management refers to the use of digital technologies in cash flow management.

In our view, digital cash flow management should produce real-time visibility into the cash position as well as transactions, facilitating cash planning and forecasting across the various entities within an organization. Doing so requires accounting processes that enable real-time visibility.

A “Continuous Accounting” Approach

Digital cash flow management is designed to improve finance and accounting departmental performance, enabling them to play a more strategic role. It is part of a “continuous accounting” approach to managing accounting that embraces three main principles:

• Automating repetitive accounting processes in a continuous, end-to-end fashion to improve efficiency, ensure data integrity, and enhance visibility into processes.
• Distributing workloads continuously over accounting periods to eliminate bottlenecks and optimize processes when tasks are executed.
• Establishing a culture of continuous improvement in managing the accounting cycle.

Continuous accounting applies modern finance technology and the flexible process-management techniques that technology allows to increase both accounting efficiency and finance department effectiveness. It recognizes the need for continuous improvement in managing the accounting function to deal with dynamic business conditions.

Continuous accounting is essential to strategically focused finance organizations. A recent Ventana Research study² found that while 83% of companies perform core finance department functions of accounting, fiscal control, transactions management, financial reporting, and internal audit, only 41% of finance departments play an active role in their company’s management and just 25% have implemented a high degree of automation in core finance functions.

Rather than simply automating existing practices to improve efficiency, continuous accounting recognizes that longstanding processes may no longer be the best approach. Today’s software offers greater flexibility in how and when elements of the accounting cycle are performed, providing a foundation that enables finance and accounting to better serve the needs of a modern corporation by being more responsive and forward-looking. Moreover, when used as a concept to define and explain a departmentwide change management initiative, continuous accounting can facilitate needed changes in a department’s culture.

Digital Cash Flow Management Landscape

The shift from traditional to digital cash flow management has been driven primarily by enterprise resource planning (ERP) and treasury system providers, as well as emerging financial technology (fintech) providers in specialized areas, such as cloud and mobile electronic payments, accounts payable (AP) automation, alternative lending, and online trading. Likewise, the connectivity of these applications with banking systems around the world has greatly improved.

The most recent trends include the acceleration of the move of these applications to the cloud, either as native software-as-a-service (SaaS) solutions or hosted private-cloud solutions. In today’s environment, treasury systems are accessed via the cloud and connected to online cash forecasting tools and integrated cash flow monitoring applications, from cash collections to electronic payments. Treasury systems have expanded over the years to incorporate advanced planning and analysis capabilities as well as financial risk management.

Data management, too, has advanced significantly over the past decade. Organizations can now automatically gather data from disparate systems (such as multiple ERP applications) to present a near real-time view of cash positions, receivables, and payables that can be broken out in any number of ways (such as legal entity or country). This eliminates the time spent wrangling data and facilitates visibility into cash flow and cash flow drivers.

A third trend is the use of machine learning and AI in the above applications and other systems, enabling the automation of a broad range of mundane and repetitive work as well as some analytical tasks. With this new generation of business applications, we are entering an era that leaves the basic work to computers and allows finance professionals to focus on the tasks that match their experience, expertise, and skills.

There is also the emergence of blockchain technology in the world of digital cash flow management. In a recent publication,³ EY points out that “while still emerging, blockchain has the potential to eliminate float from trusted financial transactions, eradicate settlement processing time and errors in booking, and support real-time global integration between finance and business operations systems.”

Real-Time Electronic Payments

As companies accelerated their adoption of electronic payments during the pandemic, faster and real-time payment systems are arising as alternatives to traditional electronic payment methods such as the Automated Clearing House (ACH), wire transfers, and payment cards. Faster and real-time payment methods include same-day ACHs, the Clearing House’s real-time payments (RTP) system, and FedNow, as well as peer-to-peer digital payment platforms such as Zelle or Venmo. In a recent publication,⁴ the Association for Financial Professionals (AFP) makes a distinction between instant and real-time payment methods. For AFP, real-time payment systems have three distinct features:

• Instant – Payment is received by beneficiary within seconds.
• Irrevocable – Cannot be stopped, amended, or recalled.
• Can be operated 24/7/365 – Available at night, on weekends, and during public holidays.

Real-time payments are particularly useful when they are time-sensitive. They are also lower cost, which makes them attractive for low-value payments and cross-border payments, as well as when linkage among countries’ real-time payment systems exist. However, irrevocability increases the risks associated with payment management and exposure to fraud risk in general. For this reason, the use of real-time payments for business-to-business payments has remained limited, compared with traditional electronic payment methods.

Blockchain Payment Systems

Blockchain payment systems (BPS) are at an early stage of development and adoption, but they have significant potential. They drive efficiency in transactions, reducing frictions and costs. The blockchain distributed database (also called distributed ledger) was invented in 2008 to create and manage the peer-to-peer digital cash called Bitcoin (i.e., Bitcoin transactions are managed using blockchain technology), but blockchain use cases have multiplied since then. In addition to supporting commercial payments of all types, the distributed ledger provides a secure and transparent way to track asset ownership and reduce the potential for fraud.

Though blockchain was invented for cryptocurrency, it can be used to record transactions involving payments in national currencies, such as the dollar, euro, or renminbi. Payment systems using cryptocurrency provide the ability to transact using a universal medium of exchange, but options involving digital national currencies are likely to multiply for those that find the volatility in cryptocurrency too risky. Moreover, in many countries payment using cryptocurrency triggers a tax event that requires the recognition and reporting of the gain or loss on its value relative to the taxpayer’s unit of account in that tax jurisdiction.⁵

A BPS is designed to provide lower-cost processing that matches or improves on other digital alternatives for speed, visibility, and insight into transaction detail. It can do so because it removes the fixed costs and overhead incurred by legacy payment processors while almost completely eliminating latency in cash transfers. These features are especially advantageous in making cross-border payments and in handling transactions between small and midsize businesses because lower costs incurred in handling the transaction reduce the fees charged. These fees can be several percentage points of the amount involved.

Blockchains offer greater security and transparency because transactions are tamper-proof and visible to everyone. A BPS also supports smart contracts, which are digital programs that are executed when agreed-upon conditions are met by both parties. These contracts allow for hands-free, immediate execution of an agreement without the need for a neutral intermediary (often some financial institution), reducing administrative overhead and increasing the certainty of the outcome. A smart contract also can incorporate workflows that trigger follow-on actions to further reduce administrative overhead.

Forecasting in the Digital Era

The increased focus on automation in the cash flow management area has led organizations to also revisit their cash flow forecasting process and their finance functions to become more forward-looking and strategic. While cash flow forecasting used to be a relatively manual and decentralized process, the pandemic forced many organizations to adopt more centralized approaches for increased visibility into cash flows globally that leverage the latest technologies. Due to ongoing uncertainties in the current economic climate and the realities of the current state of digital cash flow management, providing accurate visibility into future cash flows is a major challenge for finance departments.

According to a global survey of C-suite executives and finance professionals commissioned by the financial software provider BlackLine Inc.,⁶ “62% agree that understanding cash flow in real time is going to become more important for their company in the face of economic uncertainty. But nearly all respondents (98%) said they could be more confident in the visibility they currently have over cash flow.” The survey also indicates: “Of those that believe visibility could be improved, 49% are worried their company is making decisions based on inaccurate or out-of-date information.” As illustrated in this survey, the transition to digital cash flow management is still in its early stage or is a work-in-progress for most organizations. Still, many organizations use manual processes for cash flow forecasting.⁷ Even when automation exists, finance organizations face significant challenges, including the difficulty of predicting outcomes in a highly volatile environment, the low quality of data inputs, process or system integration issues, the difficulty in analyzing increasing amounts of data from disparate sources, or the need to upskill finance teams to leverage latest technologies.

Conclusion

With the emergence of digital technologies, the discipline of cash flow management is on the verge of transitioning from a relatively opaque, lagging, back-office liquidity management function to a more visible, real-time, efficient, and continuous integrated liquidity planning and transaction processing function. However, businesses still have a way to go to achieve that vision. Many are still in the early stages of the adoption of these technologies. In addition, system integration and uncertainties in the current business environment remain significant challenges. Nevertheless, the trend toward real-time cash flow management appears inevitable. As AFP stated in a recent article, referring to the latest treasury automation trends and our current evolution toward real-time finance, “It’s time to get comfortable with treasury automation. The future is merely a click away.”⁸

In this rapidly evolving discipline, it is important for CPAs and financial professionals to keep up with the changes and technological advances affecting businesses in the digital era. 

¹ Includes activities contributing to the optimization of an organization’s cash conversion cycle (CCC). The CCC refers to “the measurement of the time a company must finance the costs of making products or delivering services before receiving payment for them.” It is calculated as follows: Cash Conversion Cycle = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) – Days Payable Outstanding (DPO). Source: Guy Voizey and Tom Hunt, 2022 AFP Payments Guide: Unlocking the Cash Conversion Cycle, Association for Financial Professionals.
² Ventana Research Office of Finance Benchmark Research 2019.
³ “Treasury Management Systems Overview,” EY (2018).
⁴ Guy Voizey and Tom Hunt, 2022 AFP Payments Guide: Making a Business Case for Real-time Payments, Association for Financial Professionals.
⁵ Robert Kugel, Blockchain Payment Systems Have Significant Potential, Ventana Research Analyst Perspectives blog post (April 6, 2022).
⁶ BlackLine Inc. press release, “Visibility Over Cash Will be Key to Surviving Economic Storm, Claim Majority of Global C-Suite Execs and Finance & Accounting Professionals.”
⁷ “72% of Treasurers Still Do Cash Flow Forecasts Manually,” PYMNTS (Feb. 25, 2022).
⁸ “Why We Need to Get Comfortable with Treasury Automation,” AFP Exchange (Fall 2022), pages 64-67.

J.L. “John” Alarcon, CPA, CGMA, CITP, is vice president, finance, at Instem in Conshohocken, a provider of IT solutions and services to the life sciences market. Alarcon is also a member of the Pennsylvania CPA Journal Editorial Board, and can be reached at john.alarcon@instem.com.

Robert Kugel, CFA, is senior vice president and research director at Ventana Research Inc. in Bend, Ore. His research focuses on the intersection of information technology with the finance organization and business. He can be reached at robert.kugel@ventanaresearch.com.

While electronic commerce and supply chain management have taken center stage among the digital transformation initiatives arising from the unprecedented challenges encountered by businesses during the COVID-19 lockdowns, corporate finance automation has gained significant attention too as organizations rethink the interactions and collaborations among stakeholders along the value chain. This feature examines the state of digital cash flow management and the new technology landscape in this rapidly changing environment.

What Is Digital Cash Flow Management?

Cash is often referred to as the lifeblood of organizations, and effective cash flow management is the battleground for business resilience and sustainable growth.

Cash flow management consists of the planning and monitoring of the various finance functions that contribute to the supply and optimization of cash in the organization (i.e., cash management, working capital management,¹ cash planning and forecasting, financing, debt management, and investments and financial risk management). In this article, however, digital cash flow management refers to the use of digital technologies in cash flow management.

In our view, digital cash flow management should produce real-time visibility into the cash position as well as transactions, facilitating cash planning and forecasting across the various entities within an organization. Doing so requires accounting processes that enable real-time visibility.

A “Continuous Accounting” Approach

Digital cash flow management is designed to improve finance and accounting departmental performance, enabling them to play a more strategic role. It is part of a “continuous accounting” approach to managing accounting that embraces three main principles:

• Automating repetitive accounting processes in a continuous, end-to-end fashion to improve efficiency, ensure data integrity, and enhance visibility into processes.
• Distributing workloads continuously over accounting periods to eliminate bottlenecks and optimize processes when tasks are executed.
• Establishing a culture of continuous improvement in managing the accounting cycle.

Continuous accounting applies modern finance technology and the flexible process-management techniques that technology allows to increase both accounting efficiency and finance department effectiveness. It recognizes the need for continuous improvement in managing the accounting function to deal with dynamic business conditions.

Continuous accounting is essential to strategically focused finance organizations. A recent Ventana Research study² found that while 83% of companies perform core finance department functions of accounting, fiscal control, transactions management, financial reporting, and internal audit, only 41% of finance departments play an active role in their company’s management and just 25% have implemented a high degree of automation in core finance functions.

Rather than simply automating existing practices to improve efficiency, continuous accounting recognizes that longstanding processes may no longer be the best approach. Today’s software offers greater flexibility in how and when elements of the accounting cycle are performed, providing a foundation that enables finance and accounting to better serve the needs of a modern corporation by being more responsive and forward-looking. Moreover, when used as a concept to define and explain a departmentwide change management initiative, continuous accounting can facilitate needed changes in a department’s culture.

Digital Cash Flow Management Landscape

The shift from traditional to digital cash flow management has been driven primarily by enterprise resource planning (ERP) and treasury system providers, as well as emerging financial technology (fintech) providers in specialized areas, such as cloud and mobile electronic payments, accounts payable (AP) automation, alternative lending, and online trading. Likewise, the connectivity of these applications with banking systems around the world has greatly improved.

The most recent trends include the acceleration of the move of these applications to the cloud, either as native software-as-a-service (SaaS) solutions or hosted private-cloud solutions. In today’s environment, treasury systems are accessed via the cloud and connected to online cash forecasting tools and integrated cash flow monitoring applications, from cash collections to electronic payments. Treasury systems have expanded over the years to incorporate advanced planning and analysis capabilities as well as financial risk management.

Data management, too, has advanced significantly over the past decade. Organizations can now automatically gather data from disparate systems (such as multiple ERP applications) to present a near real-time view of cash positions, receivables, and payables that can be broken out in any number of ways (such as legal entity or country). This eliminates the time spent wrangling data and facilitates visibility into cash flow and cash flow drivers.

A third trend is the use of machine learning and AI in the above applications and other systems, enabling the automation of a broad range of mundane and repetitive work as well as some analytical tasks. With this new generation of business applications, we are entering an era that leaves the basic work to computers and allows finance professionals to focus on the tasks that match their experience, expertise, and skills.

There is also the emergence of blockchain technology in the world of digital cash flow management. In a recent publication,³ EY points out that “while still emerging, blockchain has the potential to eliminate float from trusted financial transactions, eradicate settlement processing time and errors in booking, and support real-time global integration between finance and business operations systems.”

Real-Time Electronic Payments

As companies accelerated their adoption of electronic payments during the pandemic, faster and real-time payment systems are arising as alternatives to traditional electronic payment methods such as the Automated Clearing House (ACH), wire transfers, and payment cards. Faster and real-time payment methods include same-day ACHs, the Clearing House’s real-time payments (RTP) system, and FedNow, as well as peer-to-peer digital payment platforms such as Zelle or Venmo. In a recent publication,⁴ the Association for Financial Professionals (AFP) makes a distinction between instant and real-time payment methods. For AFP, real-time payment systems have three distinct features:

• Instant – Payment is received by beneficiary within seconds.
• Irrevocable – Cannot be stopped, amended, or recalled.
• Can be operated 24/7/365 – Available at night, on weekends, and during public holidays.

Real-time payments are particularly useful when they are time-sensitive. They are also lower cost, which makes them attractive for low-value payments and cross-border payments, as well as when linkage among countries’ real-time payment systems exist. However, irrevocability increases the risks associated with payment management and exposure to fraud risk in general. For this reason, the use of real-time payments for business-to-business payments has remained limited, compared with traditional electronic payment methods.

Blockchain Payment Systems

Blockchain payment systems (BPS) are at an early stage of development and adoption, but they have significant potential. They drive efficiency in transactions, reducing frictions and costs. The blockchain distributed database (also called distributed ledger) was invented in 2008 to create and manage the peer-to-peer digital cash called Bitcoin (i.e., Bitcoin transactions are managed using blockchain technology), but blockchain use cases have multiplied since then. In addition to supporting commercial payments of all types, the distributed ledger provides a secure and transparent way to track asset ownership and reduce the potential for fraud.

Though blockchain was invented for cryptocurrency, it can be used to record transactions involving payments in national currencies, such as the dollar, euro, or renminbi. Payment systems using cryptocurrency provide the ability to transact using a universal medium of exchange, but options involving digital national currencies are likely to multiply for those that find the volatility in cryptocurrency too risky. Moreover, in many countries payment using cryptocurrency triggers a tax event that requires the recognition and reporting of the gain or loss on its value relative to the taxpayer’s unit of account in that tax jurisdiction.⁵

A BPS is designed to provide lower-cost processing that matches or improves on other digital alternatives for speed, visibility, and insight into transaction detail. It can do so because it removes the fixed costs and overhead incurred by legacy payment processors while almost completely eliminating latency in cash transfers. These features are especially advantageous in making cross-border payments and in handling transactions between small and midsize businesses because lower costs incurred in handling the transaction reduce the fees charged. These fees can be several percentage points of the amount involved.

Blockchains offer greater security and transparency because transactions are tamper-proof and visible to everyone. A BPS also supports smart contracts, which are digital programs that are executed when agreed-upon conditions are met by both parties. These contracts allow for hands-free, immediate execution of an agreement without the need for a neutral intermediary (often some financial institution), reducing administrative overhead and increasing the certainty of the outcome. A smart contract also can incorporate workflows that trigger follow-on actions to further reduce administrative overhead.

Forecasting in the Digital Era

The increased focus on automation in the cash flow management area has led organizations to also revisit their cash flow forecasting process and their finance functions to become more forward-looking and strategic. While cash flow forecasting used to be a relatively manual and decentralized process, the pandemic forced many organizations to adopt more centralized approaches for increased visibility into cash flows globally that leverage the latest technologies. Due to ongoing uncertainties in the current economic climate and the realities of the current state of digital cash flow management, providing accurate visibility into future cash flows is a major challenge for finance departments.

According to a global survey of C-suite executives and finance professionals commissioned by the financial software provider BlackLine Inc.,⁶ “62% agree that understanding cash flow in real time is going to become more important for their company in the face of economic uncertainty. But nearly all respondents (98%) said they could be more confident in the visibility they currently have over cash flow.” The survey also indicates: “Of those that believe visibility could be improved, 49% are worried their company is making decisions based on inaccurate or out-of-date information.” As illustrated in this survey, the transition to digital cash flow management is still in its early stage or is a work-in-progress for most organizations. Still, many organizations use manual processes for cash flow forecasting.⁷ Even when automation exists, finance organizations face significant challenges, including the difficulty of predicting outcomes in a highly volatile environment, the low quality of data inputs, process or system integration issues, the difficulty in analyzing increasing amounts of data from disparate sources, or the need to upskill finance teams to leverage latest technologies.

Conclusion

With the emergence of digital technologies, the discipline of cash flow management is on the verge of transitioning from a relatively opaque, lagging, back-office liquidity management function to a more visible, real-time, efficient, and continuous integrated liquidity planning and transaction processing function. However, businesses still have a way to go to achieve that vision. Many are still in the early stages of the adoption of these technologies. In addition, system integration and uncertainties in the current business environment remain significant challenges. Nevertheless, the trend toward real-time cash flow management appears inevitable. As AFP stated in a recent article, referring to the latest treasury automation trends and our current evolution toward real-time finance, “It’s time to get comfortable with treasury automation. The future is merely a click away.”⁸

In this rapidly evolving discipline, it is important for CPAs and financial professionals to keep up with the changes and technological advances affecting businesses in the digital era. 

¹ Includes activities contributing to the optimization of an organization’s cash conversion cycle (CCC). The CCC refers to “the measurement of the time a company must finance the costs of making products or delivering services before receiving payment for them.” It is calculated as follows: Cash Conversion Cycle = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) – Days Payable Outstanding (DPO). Source: Guy Voizey and Tom Hunt, 2022 AFP Payments Guide: Unlocking the Cash Conversion Cycle, Association for Financial Professionals.
² Ventana Research Office of Finance Benchmark Research 2019.
³ “Treasury Management Systems Overview,” EY (2018).
⁴ Guy Voizey and Tom Hunt, 2022 AFP Payments Guide: Making a Business Case for Real-time Payments, Association for Financial Professionals.
⁵ Robert Kugel, Blockchain Payment Systems Have Significant Potential, Ventana Research Analyst Perspectives blog post (April 6, 2022).
⁶ BlackLine Inc. press release, “Visibility Over Cash Will be Key to Surviving Economic Storm, Claim Majority of Global C-Suite Execs and Finance & Accounting Professionals.”
⁷ “72% of Treasurers Still Do Cash Flow Forecasts Manually,” PYMNTS (Feb. 25, 2022).
⁸ “Why We Need to Get Comfortable with Treasury Automation,” AFP Exchange (Fall 2022), pages 64-67.

J.L. “John” Alarcon, CPA, CGMA, CITP, is vice president, finance, at Instem in Conshohocken, a provider of IT solutions and services to the life sciences market. Alarcon is also a member of the Pennsylvania CPA Journal Editorial Board, and can be reached at john.alarcon@instem.com.

Robert Kugel, CFA, is senior vice president and research director at Ventana Research Inc. in Bend, Ore. His research focuses on the intersection of information technology with the finance organization and business. He can be reached at robert.kugel@ventanaresearch.com.