5 Tips for Better Cash Flow Management
“Revenue is vanity, profit is sanity, but cash is king.”
—Unknown
Is your cash flowing in the wrong direction? Cash is the lifeblood of your business. You can have fast-growing revenues and record profits, but if you aren’t bringing in more cash than is leaving your enterprise, your days are numbered. If you find yourself in a cash crunch as we kick off the new year, don’t hit the panic button just yet - here are five areas you can focus on to make sure more cash is flowing in than out.
1) Supercharge Your Collections to Get Paid Faster
Sales are great, but do you know what’s even better? Getting paid. I have seen businesses stagnate because large portions of their sales take months – or even years - to collect.
You can drive better collections in several ways, such as modifying your payment periods, requiring up-front deposits, assigning people to specifically handle collections, offering early payment discounts, specifying accepted payment methods, and changing your team’s compensation structure. You can also consider factoring your receivables in certain situations.
Improving your collections is a great way to get more cash in your coffers that you can use to invest in growing your business.
2) Master Your Payables to Keep Your Cash Flowing
Similar to tactics boosting collections, you can also manage your payables to control when cash is going out the door. You can prioritize payments to make sure the cash is staying in your account as long as possible. For example, if you owe money to three different vendors but one isn’t due until the following month, pay it closer to the due date. You don’t get brownie points for paying early (unless you’re getting a discount – more on that below).
Just as you may offer early payment discounts to customers, vendors may offer you the same. Be sure to review your cash needs rather than blindly paying early to earn the discount, however.
Some other payable management strategies include implementing a payment approval hierarchy, introducing automation, or negotiating more favorable terms with some vendors if you have a good relationship with them.
3) Audit Your Expenses to Sniff Out Waste
You’d be surprised how overhead expenses can creep up as a company grows. Sometimes taking a regular look at expenses such as insurance policies and software subscriptions can lead to significant savings. Have you recently had people leave your company? Make sure you terminated those employees’ accounts so that you aren’t being charged for additional users who are inactive (this is also good practice for cyber security purposes).
Regular review of other spending should be done in coordination with the related department. For example, you can assess the effectiveness of advertising spend with your marketing head to see if dollars can be allocated more efficiently with the same or better results.
Expense audits should also consider the budget to see if there are any areas where you are spending more than you anticipated (more on budgeting to follow).
4) Don’t Forget About Interest and Loan Covenants!
Picture the following scenario:
Your company is humming along with a profitable quarter when the bank calls and asks for your latest financial statements. Your loan with the bank comes with provisions that require that you meet a specific earnings ratio each quarter. Upon review of your financials, you find out that you missed the minimum ratio required by the loan agreement. Depending on the language in the loan, you could be on the hook for additional principal payments, or the bank could even call the loan, making the full amount due immediately. The shock of a large, unexpected sum of money leaving your bank account can leave your business reeling.
Too many companies get blindsided by payments outside of their day-to-day operations. If you have outstanding debt, you need someone who is monitoring performance not only against your internal targets, but against a lender’s requirements as well. Actively monitoring performance allows you to be proactive if you are in danger of missing a loan covenant. Your business should also keep a watchful eye for opportunities to refinance any outstanding loans, whether it be interest rate drops or negotiating more favorable repayment terms.
5) Break Out Your Crystal Ball for Some Budgeting Magic
Planning ahead is critical in all aspects of a business and predicting your cash flow is no exception. Knowing what your cash needs are one, six, twelve months ahead will allow you to chart a course that makes sense for your business. Proper budgets and forecasts will make this a worthwhile exercise, while doing some scenario planning will give you insights to take impactful corrective actions as needed.
Example – Knowing your current operations generate $50k per month, you can determine how much leeway you have to spend on a new initiative that might not directly generate cash in the short term.
Great Tips! But…How Do I Get Started?
If your head is spinning with all the possibilities and things to keep track of – that’s okay! Many of the options described above are not one-size-fits-all. It takes a skilled professional to navigate through the different courses of action to make sure your business is taking the path that best suits their needs. A fractional CFO can work strategically with business owners to ensure that cash is being managed effectively and efficiently in a way that is consistent with the business’ goals. Fractional CFOs can also help if you need a more significant cash infusion by way of debt or equity financing.
Connect with a fractional CFO today to partner with a trusted advisor who can give you clear, strategic financial guidance to strengthen your company’s cash position.