Well-Managed Cash Flow is Essential for Business Success

Consistent, efficient cash flow is a necessity for keeping a business running smoothly over time. Proactively managing it can help ensure funds are available for today’s needs, as well for long- term strategic plans. This concept is most noticeable when cash flow is tight, but it can be evident when cash isn’t adequately managed in any direction.

The conundrum of managing cash flow has stymied many entrepreneurs and disrupted even the most profitable businesses. So, what can businesses do to promote a healthy cash flow and stop worrying about whether there’s enough liquidity to cover operating expenses and invest in long-term assets such as property, plant and equipment (PP&E)?

A few guiding principles apply:

Knowledge of timing is key. The timing of receivables and payables is a delicate dance, and when they’re out of step, it affects cash flow. For example, during rapid growth, if a purchasing team is overbuying inventory, cash can grow tight. Similarly, if the accounts receivables team isn’t collecting payments in a timely manner, that can throw off the balance, too.

Profit isn’t the same thing as cash volume. A company’s income statement can show healthy profit even while it is burning through funds on the cash flow statement because the revenue figures don’t reflect whether cash has been received for all those sales. Having constant insight into your company’s cash position and quickly managing any surpluses or deficits is critical to keeping liquidity steady.

Discipline is a virtue. Putting frameworks in place to ensure timely receivables and just-in-time payments is critical to evening out cash flow. This is where a trusted advisor can help you pave the way to better cash management.

Here’s what to look for:

• Services that convert paper processes to electronic. These will speed up collections and delay payables until the moment they’re due.
  • The easier you make it for people to pay your business (recurring payments, ACH/electronic funds transfer, credit and debit card payments), the sooner the cash flows to the next obligation.
  • Seek tools that help you efficiently determine who paid you, how much and what for, easily matching up bank transactions to your own records.
  • For companies that receive check payments, remote deposit capture tools can help make deposits from your office electronically. For larger volumes of mailed payments, lockbox services automate and expedite the collection and depositing of checks to your account reducing mail and processing float.
  • Electronic payment methods allow your business to make just-in-time payments to suppliers and business partners to extend your working capital.
  • Wire transfers are another tool to speed up inflow or outflow of payables or receivables.
    
    
• Options for scheduling outbound payments and commercial card services to extend working capital. You want maximum control over the timing of payments. Online banking services allow you to strategically schedule your electronic payments. Similarly, paying your suppliers by card will extend your business’ days payable outstanding (DPO), allowing you to keep more cash on hand until your card statement is settled.
  
  
• A cash segmentation plan. Generally speaking, you should have three segments in separate types of deposit accounts:
  • Operating cash to provide for imminent payables
  • Reserve cash for additional liquidity and coverage for short-term variations in cash need
  • Strategic cash for longer term liquidity outside of normal business operations.
    • Most banks offer a sweep service that ensures any idle cash balances in your account are automatically and safely invested to increase overall returns or to pay down your line of credit, minimizing interest expense.

And last but certainly not least, seek to communicate regularly with clients and suppliers to develop cooperative advantages. Some of the best solutions lie in partnerships forged by shared values and collaboration toward mutually beneficial outcomes.

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