Treasury Management

How technology is transforming working capital management

June 19, 2024

In today's era of unprecedented technological progress, treasury management has also been radically transformed. Organisations seeking to remain competitive in a globalised marketplace cannot underestimate the importance of technology in cash optimisation, and more specifically in working capital management. 

In this article, we dive into how technology is reshaping working capital management, highlighting solutions that improve efficiency, accuracy and speed in this critical area of financial management.

The concept of working capital 

Before delving into how technology is revolutionising working capital management, it is essential to understand what this metric is and why it is fundamental to any business. Working capital is the difference between a company's current assets and current liabilities. 

In essence, it is the money a company needs to finance its day-to-day operations, and is a key indicator of the financial health and operating efficiency of organisations. 

Its interpretation is straightforward, although it requires some accounting knowledge and, of course, accounting entries that are properly updated and reconciled. Essentially, when current assets exceed current liabilities (in terms of less than one year), the company has sufficient liquidity to meet its short-term obligations.

On the other hand, when current liabilities exceed current assets, from the accounting point of view, the company would be in a situation of suspension of payments, which may lead to a refinancing of debts or, in the worst case, to the liquidation of the business.

Why is working capital important?

Effective working capital management ensures that a company has sufficient liquidity to meet its short-term obligations and finance its short-, medium- and long-term growth. 

Traditionally, this involved careful monitoring of accounts receivable, inventories and accounts payable, as well as an ongoing relationship with banks to identify potential risks associated with their bank accounts. But this way of working had its problems, as it was costly, required the availability of numerous personnel and, of course, was not error-free.

However, with the introduction of advanced technological solutions, companies now have much more sophisticated tools at their disposal to properly manage their entire treasury and, in general, all their financial processes. This goes beyond streamlining processes; it allows them to reduce costs, automate tasks and provide insight that contributes to the smooth running of the business.

Working capital and the technological revolution: an unbeatable duo

The technology revolution has become the perfect catalyst for the transformation of working capital strategies. So much so that they have become an inseparable duo. Below, we explore the factors facilitating this transformation.

Process automation

Today, automation has become a central element of modern treasury management for all companies, which undoubtedly has a direct impact on working capital management. 

Thanks to automation, companies can reconcile their accounting records in a matter of minutes, a task that traditionally could have taken hours or even days and would have been highly labour intensive.

Today's accounting software is equipped with algorithms that can compare massive volumes of transactions between bank statements and ledgers, highlighting discrepancies with astonishing accuracy.

Similarly, automation has freed employees from repetitive and monotonous tasks, allowing them to focus on higher value-added activities and bringing out their full potential. In addition, by minimising human intervention, the likelihood of errors is drastically reduced, resulting in more accurate and reliable financial records.

Treasury Management Platforms

Treasury management solutions, such as Embat's, enable companies to have real-time visibility of their liquidity and cash flows, as well as make short-term forecasts on their cash management. 

These platforms are able to integrate with banks and ERPs to provide a consolidated view of cash flow, which is critical for making informed working capital decisions.

In addition, today, thanks to bank infrastructure openness to third parties and the potential of APIs, information between banks and companies flows in real time, allowing information to be available whenever and wherever it is needed. 

Financing solutions 

Technology is enabling access to new sources of external financing to cover liquidity needs, whether short, medium or long term, and is essential for proper working capital management, especially when liquidity needs are pressing. Never before has it been so easy and quick to access financing tailored to the needs of each company.

Nowadays, fintechs have launched financing modalities never seen before, which in some cases promise to be the solution to the liquidity needs of many companies without going through the banking circuit. 

Even banks have joined this revolution, by updating their technology-supported financing solutions. Bill discounting, Factoring, Confirming and many other financing solutions are now common solutions for financing working capital.

Artificial intelligence (AI) and machine learning

Artificial intelligence (AI) and machine learning are playing increasingly significant roles in many areas of our day-to-day lives, and treasury management in general and working capital in particular has been no exception. 

These technologies are able to predict future cash flows based on historical data, market trends and economic variables, as well as identify patterns in customer payments and suggest measures to improve the cash conversion cycle.

In addition, these tools are increasingly suggesting financial measures that can shorten the cash conversion cycle, thereby increasing the availability of working capital without the need for external financing.

Blockchain and smart contracts

Blockchain and smart contracts are two sides of the same coin. They are breakthrough technologies that promise to make a splash in corporate treasury by providing secure, transparent and automated transactions. 

The best example of this is cryptocurrencies, a digital medium of exchange that uses cryptography to secure transactions, ensuring privacy in operations and encouraging the automation of processes, however complex they may be. And although they have their naysayers, there is no doubt that they are here to stay.

In fact, these technologies promise to drastically reduce the processing time and costs associated with transaction settlement, which has a direct impact on improving working capital.

Open banking

Open banking has become one of the most disruptive innovations in the financial sector, with a profound impact on working capital management. The premise of this technology is based on the use of APIs (acronym for Application Programming Interfaces) that allow third parties to develop applications and services around financial institutions. In the context of working capital, open banking offers a framework for optimising financial resources that was previously unthinkable.

Its first major contribution is its ability to integrate and consolidate financial information from multiple bank accounts and payment platforms. Companies can obtain a real-time overview of their financial situation. This means that CFOs and treasurers can monitor cash flow more accurately, identify liquidity surpluses and adjust their working capital more effectively. 

In addition, open banking facilitates more efficient and less costly payment processes. By automating bank reconciliation and simplifying transactions between different accounts and financial institutions, companies can significantly reduce the time and costs associated with working capital management. 

For example, payments can be scheduled and executed automatically and in accordance with company policies, thereby improving cash flow management and reducing the operational costs associated with manual handling of finances.

Conclusions and future outlook

There is no doubt that technology has changed working capital management, and there is every indication that this trend will only accelerate in the future. The adoption of technology solutions is not only desirable, it is essential for any company seeking to optimise its financial position and operations.

Companies that stay ahead of the curve in implementing these technologies will enjoy significant competitive advantages, including improving liquidity or boosting profitability. The continuing evolution of the technological landscape suggests that future solutions will be even more integrated, intuitive and potentially disruptive.

Companies must remain informed and responsive to these innovations to manage their working capital effectively. Those that balance the challenges with the emerging opportunities will be well positioned to thrive in tomorrow's complex financial landscape.

CTO @ Embat
Tomás, with a background in telecommunications engineering, began his career in bank connectivity when he took on the role of CTO at Fintonic Latam, before joining Embat.

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