PwC Report Points to Critical Need for AR Automation

7 minute read

Are corporations that need to protect working capital prepared for the coming financial headwinds?

In today’s world of accounting management, uncertainty and market volatility have become the norm. Ongoing financial and political upheavals have led CFOs and accounting teams, seeking to protect net working capital (NWC), to make decisions in a crisis-to-crisis fashion.

Corporations should therefore pay close attention to the most recent PwC report. “Working Capital Study 22/23” provides an all-too-real overview of how corporations are trying to navigate market uncertainties and why they should consider making adjustments to their financial strategies.

At the outset, the report highlights a few positive NWC ratio indicators. Since 2020, there has been a 2.5% fall in annual NWC day (a five-year low), a €0.8 trillion increase in working capital, and continued recovery from the heightened levels of the pandemic.

But the report also warns about “trouble brewing under the surface.” It speaks to impending financial “headwinds” that include rising inflation, supply chain disruptions, and the war in Ukraine and characterizes companies around the world as being unprepared for what’s to come: 

To properly and sustainably protect NWC and manage accounting processes, it’s critical that companies ask some key questions:

• How are we currently reacting to post-pandemic market curveballs?

• How do these behaviors fit into our long-term business strategies?

• Could these reactions be negatively impacting NWC?

• Do we have untapped resources that could help develop more sustainable strategies to combat unpredictable market volatility?

Let’s take a look at what corporations are currently doing to try to guard against economic “turbulence” and how they can develop better long-term financial strategies to combat today’s market uncertainties.

“Just-in-Case” Approaches

The overall picture of cash position as laid out in the PwC report—declining by 10% in 2021 from 70 to 63 days—is encouraging and indicates that companies are operating with a “cash buffer to withstand uncertainties.”

Yet the report raises the concern that there is a “lag” that may lead to “a false sense of security.” Furthermore, as corporations try to stay ahead of unrelenting supply chain disruption, they adopt “just-in-case” approaches, such as:

• Over-ordering, which can lead to inventory levels that fail to match market demand

• High stock write-offs

• Increased allocation planning driven by shortfalls and constrained capacity

Reactionary approaches might provide some salve, but they also exponentially increase “the risks of future obsolescence by extending the response time to dips in demand, as well as increased capital consumption from running at higher safety stock levels.”

The report states that corporations seem to be missing the fact that inventory performance has remained largely static. “Improvements in the working capital ratio have stalled,” the report notes. “And while it is still better than before the pandemic, we’re starting to see more signs of supply chain disruption filtering through to working capital performance.”

These issues are exacerbated by rising inflation (which the report predicts will continue for the next two years) and less access to borrowing due to rising interest rates. With central banks increasing interest rates to combat inflation around the world, corporate cash flows are coming under intense pressure.  The result of this “lending squeeze” will mean that both funding and working capital will become more costly.

Driving Efficiency & Financial Resilience

With predictions of slow and weak growth, stubborn inflationary pressure, and high financing costs, the report encourages corporations wanting to protect working capital, steer through economic turbulence, and boost growth to ask themselves some key strategic questions. For example: 

• What is the optimal level of working capital for their businesses?

• What adverse economic developments could jeopardize their working capital position?

• How can they uncover and release cash that’s tied up?

• Are operational processes ready to react to future disruption and proactively protect cash flow?

It’s worth zeroing in on that last question about readiness. It underscores the need for companies to adopt automated AR processes to free up working capital not available to treasury and lines of credit. This allows customers to keep spending and minimizes risk, bad debt, and revenue being backed out of the business.

By expanding team capacity and improving decision intelligence, organizations will be able to optimize working capital, brace for ongoing market shifts and volatility, and strengthen sustainable planning and growth efforts.

Improve Resiliency by Optimizing Working Capital

With “wider economic and liquidity headwinds looming” and debt funding becoming more expensive, the PwC report indicates that companies should “rethink” the way they approach working capital and stock reduction write-downs.

“The pressure on liquidity is steadily increasing,” states the report. “This makes it more important than ever to sharpen your focus on cash flow management and drive working capital optimization.”

But just how to get there? Is there a way for companies to achieve accounts receivable excellence in order to mitigate the evolving pressures on working capital?

Here at BlackLine, we answer that question with a resounding yes. We’re accustomed to working with organizations needing to protect working capital so they can optimize AR business performance and soften the impact of inflation pressures, interest rate hikes, and supply chain bottlenecks.

We do this through the adoption of next-generation, intelligent AR automation, an approach that gains efficiencies across processes, departments, and global entities, saving many hours of staff time and, even more importantly,  strengthening organizations’ ability to navigate unpredictable, volatile market changes.

By replacing inefficient, manual AR processes, companies can increase working capital. They are also better able to manage behavioral changes of customers facing cash crises, work through supply chain disruptions, and quickly prioritize payment processes, effectively reducing days sales outstanding (DSO) lag time.

Accounts receivable optimization helps to offset the problems created by operating in “just-in-case” mode and address issues in a holistic, sustainable ways, such as:

• Optimizing business performance. Increases working capital and availability of cash that are critical to a company’s success; collects more cash and significantly reduces DSO by increasing overall productivity and prioritizing the actions that have the highest impact.

• Maximizing AR team capacity and efficiency. Improves productivity and morale while reducing costs by eliminating manual and error-prone processes; elevates control, gains visibility, and measures all parts of the process while achieving global standardization.

• Elevating AR intelligence and data-driven decisions. Improves clarity and real-time decision intelligence by providing the most accurate, up-to-date data that’s critical for sales, operations, and treasury departments.

• Improving customer and business relationships. Better communication and operational efficiency allow companies to become more reliable, trusted business partners, which could not be more important in challenging times.

According to the report, companies trying to protect working capital are sitting on unused resources. In fact, PwC estimates that companies have on their balance sheets €1.49 trillion in excess working capital, “money that could be put to much more productive uses.” One effective use of this surplus would be to automate AR systems. 

One example of a company that has been able to harness the efficiency of AR automation is Brambles. The large supply chain logistics company adopted BlackLine’s Cash Application platform to streamline the cash application process. Prior to implementing Cash Application, Brambles outsourced its cash application process which made it costly and difficult to manage. Some of its regions, such as Africa and Latin America, didn’t have any automated processes.

Intelligent automation now ensures minimal manual intervention with matching algorithms accurately processing receipts without remittances. Brambles systematically implemented Cash Application region by region, enabling the organization to standardize the process while adhering to local requirements. As a result, the company’s Latin America team was able to move from manual processing to an auto-match rate of more than 75%. Overall company-wide auto-match rates rose from less than 38% to more than 80%. In places like the United States, they were as high as 92%.

The transformation of cash application processes positively impacted collections and cash flow and improved working capital, even as the company continued to grow. 

Benefits Brambles achieved from automating cash flow processes:

• Increased global auto-match rate from less than 38% to over 80%

• Gained global visibility into cash flow

• Improved ability to accommodate local requirements and acquisitions

• Standardized the cash application process

• Reassigned staff to perform customer-valued work

Learn how BlackLine’s solution provides the technology and know-how to replace time-consuming, manual processes and better protect NWC for the long-term—no matter how unpredictable and volatile global markets get.