The 9 Levers of Cash Flow Optimization

Cash flow management is essential to the survival and growth of any business. In fact, poor cash flow management is the leading cause of business failure. However, with the right tools, resources, and disciplines, you can take control of your cash flow and ensure the success of your business.   At its core, effective cash flow management means having a clear understanding of your business’s income and expenses, and being able to anticipate and plan for future cash needs. This requires accurate financial tracking and reporting, as well as a comprehensive understanding of your business’s cash cycle.

Business Owners in the Greater Miami area continuing to experience shockwaves in the areas of supply chain, securing talent, and rising prices. Inflation is at levels not experienced in the United States in more than thirty years. It is for this reason that strategic business advisors are focusing on a critical mission: optimizing cash. Between increased costs and lowered sales, some businesses will find themselves low on cash, perhaps to the point of significantly impacting their ability to meet operating costs and stay afloat.  Now is the time to do what is necessary to preserve cash. Here are nine important cash flow tips for times of economic uncertainty:

1. Create a Robust Cash Flow Management Plan: 
   Running out of cash is always a top concern for business owners, but it becomes especially concerning during an uncertain economy. Start by getting a handle on your current cash balances, monthly revenue and expenses. Create a rolling cash flow forecast for the next quarter to guide the management team and to serve as an early warning tool that alerts you to variances. Activities that can drain your cash flow include invoices that are not billed in a timely and prompt manner, customers that delay payment, and inventory that is increasing faster than sales. Establish a process to create cash flow forecasts that are continually modified and updated as new information becomes available. A forecast for the next four to six weeks will help you keep it realistic. Keeping one for the next 13 weeks/next quarter is even better.
2. Understand What’s Causing Cash Flow Problems: 
   The most common reasons behind negative cash flow are fast growth, gross margin deterioration (a big gap between sales price and cost of the products sold) or timing differences between making sales and paying off expenses like vendor supplies, employee salaries or day to day operations. The best way to stay ahead of difficult times is to be prepared. Every business will experience fluctuations in cash flow and it’s best to prepare income statements, projected cash flow and a statement of receipts and disbursements for the coming 6-12 months.
3. Create and Follow a Consistent Budget:
   You can work with a trusted strategic advisor like a B2B CFO® in order to plan quarterly and yearly budgets accordingly. By careful planning, strategic contracts with vendors, or collecting department leads’ numbers on how much operations for that team cost, for example, you can give your business the time to rethink expenses and profits, or make different decisions for the year that can save some money. Be sure to assess your finances from the year before and adjust any numbers for upcoming changes, like new pricing or new hires. Remember that budgeting cash flows to actual deposits and expenditures helps you predict your future cash flow.
4. Use Proper Cash Management Tools:
   Investing in the right cash flow management software can save your business money in the long run. It can help you manage the cash flows that ebb and flow in your business and see what transactions are sustainable and which are hurting you. Work with a B2B CFO® Partner to understand which tools connect Income Statement and Balance Sheet information from your accounting software into organized cash flow statements and reports. These solutions can crunch the numbers and help you develop financial strategy in real-time— as well as forecast various outcomes depending on hypothetical decisions.
5. Collect A/R & Invoice Early And Stretch AP:
   Invoice your customers daily or immediately after a product or service is bought and supplied. It’s also important to actively pursue established collection policies with your accounts receivable. Consider establishing a collection process or even a late fee if a customer does not pay their invoice on time and be sure to coordinate their payments with your payments to suppliers and vendors. Also, try to lengthen your AP cycle where possible.
6. Assess Purchasing Policies and Vendor Contracts:
   To have good business, you need to invest in inventory that sells but be sure to keep inventory levels at the minimum. Try to adjust how much inventory you’re buying, evaluating your customer’s demand to have the proper supply. Over-spending on inventory that ultimately won’t sell can decrease your cash flow immensely. In parallel, help your accounts payable out by avoiding late fees or interest charges. Think about which vendors you can have a relationship with and ask for extended terms or contracts where you can pay later.
7. Open a Line of Credit:
   Your bank can be your best friend if you have the right relationship. Work with a strategic business advisor like a B2B CFO® to cultivate a mutually beneficial bank relationship where you open a business line of credit that works for you, so that you can avoid any risk of rejection if times get tough. This way, you have an established resource to turn to if money does ever get tight.
8. Review Pricing Models:
   Faced with rapidly escalating prices, many businesses have struggled with decisions to increase prices for the products and services they sell. Customer retention and sales growth targets are two considerations that sometimes weigh more heavily than bottom-line profit in the current period.  Many businesses are contractually obligated to their current pricing structure which adds complexity to approaching customers to discuss price increases.  Assessing this decision should be a team effort within your company that involves sales & marketing, finance & accounting and operations.  A divide can exist between knowing you need to increase prices and putting that decision into action – especially when the changes your company is experiencing are happening very quickly and no end is yet in sight.  Monitoring on-going economic and industry developments is an essential part of this process.  If you determine a price increase is the right move for your business, another decision looms:  how to implement. There are various strategies to consider such as which products, services and customers are affected, once-and-done or phased approaches, timing, communication, stock levels, and other factors.  Planning and coordination among the team members is vital.

9. Turn to a Strategic Business Advisor:
   Having the right talent with the right vision and bigger picture is essential to cash flow management. Business can truly benefit from business and financial expertise that understands and promotes efficiency within teams and seeks out solutions that optimize cash flow. To this end, working with a trusted advisor is critical for cash flow management as the right expertise can lead to the right  understanding of your expenses, revenue and business. Improving cash flow requires the discipline of looking into the future. Improving and managing cash flow is a process within a company and not vested with any one single person. That’s why CEOs and Business Owners turn to a B2B CFO® for financial expertise and best practices for managing cash flow. I can examine your current cash flow trends and using best practices and forecasting tools, we can ensure you have a financially healthy future for your company. If your company is experiencing a cash flow shortage or you want to proactively infuse proper measures to keep cash flow healthy, please contact me today for a discussion: Email me at TerryMosier@b2bcfo.com.