Tips for Better Cash Flow Management

Cash flow management is a key area of concern for almost every small (and even larger) business owner. The truth is though, when a business owner says that they are concerned about cash flow, it can mean a variety of different things, like:

• They have cash on hand, but every month it is dwindling down bit by bit and if something doesn’t change, they will be in a precarious position in the near future.
• They are able to manage their cash flow but it gets tight sometimes and they would like to have more visibility farther in advance about when that might happen.
• They are really struggling to keep up with their outflow requirements (vendor payments, payroll, credit card payments, etc.) but things generally even out over a period of a few weeks.
• They cannot keep up with their cash outflows and they are really worried about managing their vendor relationships in light of this. They feel like their operations should be able to support the cash needs of the business but it is and has been a constant struggle.
• They are behind on their obligations, they are in a cash flow hole that they are sporadically plugging by injecting their personal cash into the business and it feels like a downward spiral has hit.

Just like these are different scenarios that can be explained by the same vocabulary, the reactions you can take to approach them are also different and more or less possible due to the level of financial stress in the business. Here are some possible pathways to address them:

Short-term Cash Wins

• Review your Accounts Receivable processes to make sure that you are billing your clientele in a timely and accurate fashion. If you have aging A/R, make it a daily task to make efforts to collect that.
• Asking vendors for temporary consideration on better payment terms (i.e. longer payment terms). This works better if you are not already late with them.
• Looking for options to accelerate the cash payment terms from your clientele. This may be more possible with new sales than it is with existing relationships, but it is not impossible with those either.
• Considering uses of cash that are not apparent in the costs and expenses reflected on your P&L. For example: do you have inventory that does not turn? Can you offload that for some quick cash?
• Using tools like purchasing cards to extend the cash impact of your business-related purchasing out for one additional monthly cycle.

Longer-term Cash Strategies

• Cash flow forecasting can give you foresight into when you will be short on cash, and thus the ability to strategize to prevent it rather than only reacting to it in the moment. This is much more effective if you are not using cash-basis accounting. It is very laborious and difficult to forecast cash flow when you have no visibility to your payables until they get paid.
• Considering the item above, converting to an accrual basis is very helpful in providing better cash flow visibility in advance.
• Implementing tools that better manage inventory turnover by SKU. Holding inventory too long is one of the primary ways to negatively impact your cash conversion rate.
• Revising your contract payment terms with clients (more applicable on longer term contracts) to better align their payments to you with your payments to your vendors.
• Paying very close attention to your gross margin performance by revenue type. You may be losing margin due to ineffective pricing strategies and be unaware of it if you do not have visibility to your margin by segment. In general, higher margins result in more cash flow.
• Review of operating expenses, particularly that related to advertising and staffing, with an eye toward return on investment. This is not necessarily only about cost cutting, but about allocating resources in the best way to create the most return.
• Considering options for refinancing higher interest debt into lower interest debt, particularly if it may be spread over a longer term.

These are just some strategies that can help with cash flow, they may or may not be applicable to your business, but we certainly hope they help you think more constructively about how you approach the management of your resources in the future.

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