Table of Contents
- What is Cash Velocity?
- How Does a Business Calculate Cash Velocity?
- Why is Cash Velocity Important?
- How Do You Increase Cash Velocity?
- Manage Twice the Payments Without Adding AR Staff
Key Takeaways
- Cash velocity, or the speed at which a business generates revenue, is critical for thriving in today's economy, especially for software companies.
- Improving cash velocity involves speeding up revenue collection, managing inventory better, and negotiating longer payment terms with suppliers.
- Digital payment tools like auto collections and smart lockboxes can significantly enhance cash velocity by streamlining accounts receivable processes.
- Automating AR tasks reduces costs, improves efficiency, and reduces the need for additional AR staff.
In the ever-changing economy, cash velocity is crucial for businesses to thrive. Software companies, facing shifts in funding and valuation, are now focusing on this more than ever. Learn about cash velocity, why it matters, and how to speed up revenue collection. Explore tools like digital payments and automated processes to boost your company's accounts receivable (AR) management, financial health, and growth.
Cash velocity is essential in every industry. However, as we transition to an economic landscape where cash is not always available, it has become increasingly important for software companies.
Software companies' private and public valuations have dropped by 40% to 80%, even with funding rounds. Despite the economic headwinds, private equity and venture capital still seek companies generating predictable growth. However, managing growth requires hiring more AR staff.
These are some steps your team can take to put your software company in the right place and take advantage of every opportunity.
What is Cash Velocity?
Cash velocity defines how quickly your business can generate revenue. For finance teams, cash flow is king. Understanding how it works and how to improve it can be game-changing for organizations' financial health.
How Does a Business Calculate Cash Velocity?
To calculate cash velocity, you need the following information:
- Days Sales Outstanding (DSO): This measures how long it takes, on average, for a business to collect its accounts receivable. It is calculated by dividing the average accounts receivable balance by the annual revenue and multiplying by 365.
- Inventory Days on Hand (DIO): This measures how long a business can sell its inventory on average. It is calculated by dividing the average inventory balance by the cost of goods sold and multiplying by 365.
- Payables Days Outstanding (DPO): This measures how long it takes, on average, for a business to pay its accounts payable. It is calculated by dividing the average accounts payable balance by the annual cost of goods sold and multiplying by 365.
Cash Velocity Formula
Once you have this information, you can calculate cash velocity using the following formula:
Cash Velocity = DSO + DIO - DPO
For example, if a business has a DSO of 30 days, a DIO of 60 days, and a DPO of 45 days, its cash velocity would be 45 days (30 days + 60 days 45 days).
Why is Cash Velocity Important?
A shorter cash velocity is generally better, meaning a business generates cash more quickly. This can be achieved by improving inventory management, reducing the time it takes to collect accounts receivable, and negotiating longer payment terms with suppliers.
Consider this scenario: if you are waiting for an extended DSO period to receive your owed funds but lack sufficient overhead to cover current employee salaries, your company may be forced to close before revenue enters your bank account.
AR departments are officially at the mercy of payers and have little recourse in accelerating payments to improve cash flow. For finance teams, cash flow is king, and understanding how cash velocity works and how to improve it can be game-changing for the financial health of organizations everywhere.
How Do You Increase Cash Velocity?
Speed Up Your Time-to-cash
Finance teams face challenges with paper check payments, such as mail floats and susceptibility to loss, tampering, and fraud. While most business processes have gone digital, B2B payments remain slow and error-prone. Tools like auto collections, reconciliation, "pay now" links and smart lockboxes can improve DSO by 80%. Digitizing the cash cycle with the right B2B payment processor eliminates paper checks and streamlines cash management.
Paystand’s Smart Lockbox seamlessly integrates with any ERP system, enabling a paperless cash cycle from payer to merchant. It provides one-click migration for existing check payers, digitizing future check payments. Features include remote remittance processes, immediate cash flow visibility, centralized collections, reduced receivables risk, and 24/7 payment tracking. The right digital payment solution can enhance cash velocity and accelerate business revenue collection.
Automate Essential AR Tasks
Manual AR processes hinder cash velocity and drain company funds. Automating these processes speeds up finance operations, reduces costs, and improves strategic development.
Typical AR teams often deal with complex systems that include the following:
- Invoice creation and presentment
- Following up with multiple emails and phone calls until the invoice is paid
- Signing contracts and underwriting with multiple banks
- Sharing remittance information
After that, finance teams must keep track of paid and unpaid invoices with multiple banking partners, keep track of payments, and wait 7 to 15 business days for the payment to show that it’s been posted.
B2B payment solutions can cut AR staff costs by 50% and boost cash flow. Automated AR solutions reduce fraud and errors and enhance security, making digital B2B payments more secure than paper-based ones.
Reduce Transaction Fees to 0%
Credit card payments come with high merchant fees of up to 3.5%, resulting in lost revenue for businesses. Interest rates are also rising, and credit card companies have a significant influence in determining these rates.
Paystand's zero-fee bank-to-bank network solves these problems by seamlessly integrating major ERP systems and enabling instant payments without fees. This system can save businesses money on transaction costs and reduce the time spent on manual processes. It is the easiest, safest way to send and receive money, and it allows your finance team to do the following effortlessly:
- Use Least Cost Routing (LCR) technology to help customers shift to zero-fee, digital payments.
- Control costs while maintaining flexibility for customers.
- Offer alternative payments that calculate customers’ savings in the checkout window.
Manage Twice the Payments Without Adding AR Staff
Software companies can have problems at any time, problems compounded by the current economic environment. To grow without adding more AR staff, they need to streamline in anticipation of an IPO or acquisition. Due to inadequate data, they may also struggle with budgeting and cash flow projections.
Paystand helps make it all less complicated with the following:
- White-label customization for email invoices
- Single-click payments with an embedded "Pay Now" link
- Flexible payment methods including zero-fee bank network, ACH, credit cards
- Automated invoicing, payment reminders, and reconciliation
- The ability for payers to see open invoices and pay per line item
- Greater visibility and ability to forecast and budget cash flows using real-time updates and analytics
You have many tools at your disposal to increase cash velocity. If you're ready to explore how to speed up your time to cash and cut transaction fees, book a demo with one of our payment specialists today.