For Lenders, Cash Analytics Are Key to Limiting Risk

Financial institutions take a wide range of business owner metrics into account throughout the process of commercial loan decision-making. For banks that offer multiple commercial lending products, from working capital to commercial real estate loans, the factors that drive the decision-making process may vary, increasing the number of data sources consulted and the amount of time it takes to move from application to risk analysis to funding. What’s more, banks that have not transitioned to using a lending automation platform for decision-making may be employing multiple disparate applications, including Excel spreadsheets, QuickBooks, and other (arguably outdated) accounting software packages to achieve adequate functionality in assessing loan candidates. The addition of each new application into the lending process compounds the potential for mistakes, whether they’re due to a single typographical error or even deliberate fraud on the part of borrowers.

Assessing Your Top Loan Processing Priorities

It’s all important, of course:  optimizing the application process to provide customers with a simple, trust-inspiring experience. Gathering financial statements, tax histories, and accurate data from third-party sources. Calculating financial ratios. Cautious underwriting. That’s why the most effective lending automation platforms combine numerous vital functions into one intuitive package and present them to lenders in a convenient, user-friendly dashboard.

Simplicity and the availability of critical data in real-time are just two of the reasons why CFOs and other banking industry leaders are increasingly turning fully-integrated, multi-function automated lending platforms, such as the one created by Biz2X. But some of these functions can be met by individual, stand-alone applications, too.

Cash flow analytics is one such function. It’s one of the most critical and time-consuming steps in commercial lending decision-making. And it cuts both ways.

Why is it so important to understand a potential customer’s cash position before extending him or her a loan? Lenders must produce accurate cash flow projections for their borrowers’ businesses to be sure they’ll have sufficient liquidity from month to month to cover their loan payments. Many small business owners don’t have robust cash flow management procedures in place. They may not rely on enterprise resource planning systems or routine cash flow forecasting. Nor may they have the capability to aggregate information from multiple financial data sources, such as balance sheets or receivables and outflow reports. They’re not well equipped to undertake comprehensive scenario planning to navigate the ups and downs of their businesses successfully.

But that’s just one edge of the sword. As a lender, borrower liquidity drives your own. Your ability to remain on solid financial footing depends on filling in the gaps business owners have in their knowledge base and cash analysis systems. Relying on your customers’ budgeting prowess and their ability to predict future cash flow is simply too risky.

Should You Integrate Cash Flow Management Tools into Your Lending Process?

As a lender, how do you decide whether the cash flow forecasting software—whether through a stand-alone application like Xero or CashAnalytics or a full-throated automatic lending platform—can benefit your business? Start by taking a careful look at your loan application, underwriting, and approval processes and by calculating what proportion of your working capital is at risk annually. If it’s more than 50%, you should certainly consider integrating a cash flow planning tool to monitor and optimize your institution’s fiscal performance.

Question Number One: Can Cash Flow Analysis Help You Become More Competitive?
With more and more financial institutions relying on automation to manage their lending business, bankers are under increasing pressure to optimize the customer experience they offer. Borrowers—actually, when you think about it, pretty much every business owner and consumer out there—has been trained by the digital revolution to expect instant gratification or something close to it. Any manual steps your own process includes. Emails and phone conversations detailing the progress you’re making toward closing stretch your lending timeline. Today’s more savvy borrowers are likely to ask more questions and demand more detail along the way. It takes time—and may even open you up to some risk—to provide the level of education and person-to-person service today’s customers are seeking.

Any steps you take to shave a day or two from your average loan closing time make you more competitive in the marketplace. How long does it typically take your financial institution to fund a loan? Decision-making steps like cash flow analysis are some of the most time-consuming parts of your process. Ask yourself how quickly you’re able to access the data sources you rely on. Are you employing multiple accounting software packages in your decision-making? Aggregating the data points each application provides and transforming them into meaningful intelligence can be complicated. The consolidation of all of these disparate products into one speedy, integrated process (or a complete automated lending platform) is one of the best arguments for purchasing a cash flow analysis product.

Question Number Two: What Can Better Cash Flow Planning Mean for Your Business?
Just like your customers, your financial institution has bills to pay. Accurately calculating your working capital— monthly, annually, and beyond—will help you run a much more stable business. Cash flow planning allows you to anticipate and address potential cash shortages before they occur. In addition to hedging against cash shortfalls, accurate, automated consideration of cash flow data can help you be more nimble and maximize your investment opportunities during periods of cash surplus.

It can be complicated to arrive at working capital estimates. Cash forecasting software typically provides greater visibility into a wide range of metrics, allowing you to study any areas of vulnerability through one or more well-organized dashboards. The calculations provided by a robust cash analysis tool will reflect your receivables and a wide range of outflows, from the investments your institution makes and dividends paid to shareholders to tax liabilities and changes in the interest rates your company is paying. The software will take float—an often-overlooked factor—into consideration to give you a true picture of your cash position over time.

How might having all of this cash flow data at your fingertips change your operations and decision-making process? One potential benefit is that your labor costs could decrease as your employees become more productive. Removing manual tasks from employees’ plates gives them more time to work on more business.  Giving all members of your team access to the same information in real-time can encourage more dynamic collaboration and you may gain further efficiencies, beyond what the software itself provides.

Question Number Three: How Can Cash Flow Planning Influence Pricing Decisions?
The short answer is that having a firm grasp on your cash flow position at all times can help you make smarter pricing decisions. Your pricing model should incorporate not only the risk profile of each borrower you serve, but also take into account how the interest rates and terms you offer customers should be adjusted to protect your cash flow position long term. Ideally the cash flow planning tool you select will integrate with your underwriting process in the ways that Bix2X and other lending automation platforms do. Smart pricing models balance the potential revenue increase with the increased risk of borrower default that may come with charging higher interest rates.

Question Number Four: Can Cash Flow Planning Make Your Institution More Attractive Investment?
Successful investors are cautious and evaluate a wide range of factors in their investment decision-making process. Your cash flow position can help your institution gain investor confidence. Existing shareholders expect consistent ROI—and potential investors who provide debt capital want to be assured of a company’s solvency before becoming a shareholder. Vendors, who provide the expensive systems that keep your business humming, will evaluate your institution for credit risk before deciding to do business with you. Your institution is also subject to regulatory requirements that set minimum liquidity standards. In other words, lenders have to meet multiple KPIs and address the concerns of many stakeholders as they operate. A cutting-edge cash flow projection product can help you meet those goals.

Choosing The Right Solution for Your Institution

Numerous accounting software packages offer some of the features you need to be cash-flow savvy in your business. But they may not furnish you with all of them. Here’s a list of high-priority features you should look for before making a purchase decision. 

• Aggregates information from multiple data sources, including legacy systems
• Integrates a wide range of inflows and outflows
• Gives you real-time visibility into your daily cash position
• Provides short-term and long-term projections on your working capital position
• Allows you to customize KPIs
• Suggests smart pricing models
• Speedy implementation with training provided
• Offers an intuitive, easy-to-use dashboard
• Streamlines team communications

We invite you to bring any questions you may have to Biz2X. Call us at 800-200-5678, drop us an email, or schedule a demo to learn how our platform can boost your lending IQ and help you make shrewder lending decisions more quickly and efficiently than you’ve ever made them in the past.