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Cash Flow Management - Is Your Business at Risk Without a Sound Cash Management Strategy?

Cash Flow Management - Is Your Business at Risk Without a Sound Cash Management Strategy?

Cash is the lifeblood of any enterprise. Companies with strong cash flow are better positioned to grow and take advantage of opportunities as they arise. Conversely, a lack of effective cash management can be a cause of stress for the company or lead to the demise of the business.

To better understand the impact of cash flow on your company, it’s important to first understand a few important terms and concepts.

Cash flow is defined as the inflow and outflow of money from the company. It enters your business as customers buy products or services. It exits the business as you cover everyday expenses, such as supplies and payroll.

Liquidity is another term that comes into play when discussing cash flow. Liquidity refers to your business’ ability to meet its current obligations using liquid assets, or in other words, cash.

To remain profitable and support growth, it is essential for businesses to maintain a positive cash flow.

The Challenges in Managing Cash Flow

Approximately 50% of businesses fail by their fifth year of operation. A primary reason for these failures is lack of working capital and an inability to manage cash flow.

There are several challenges that businesses face when it comes to establishing effective cash management practices. For small businesses, lack of available resources is often to blame. While large corporations will have specialized treasury management teams to create and manage rigorous cash flow processes, smaller businesses can lack the wherewithal to hire even a single employee trained at this level of financial management.

Managing accounts receivables and payables is another challenge that can negatively impact a business’ cash flow. According to a study conducted by QuickBooks, 53% of companies send out invoices to receive payment on goods or services sold. For 66% of these businesses, the amount of time it takes to receive payment on these invoices—more than 30 days for 31% of respondents—has the biggest impact on available cash.

Unnecessary spending may also lead to cash flow problems. Periods of high earnings can inspire companies to make purchases or invest in upgrades. If these expenditures are followed by several months of slow sales or stagnant payments, the organization may soon be faced with cash flow problems.

Undervaluing your products or “scope creep” for service-oriented businesses can also inhibit the amount of available cash the business has at its disposal. If a business is not charging enough to make a profit off of goods, or finds that they are repeatedly spending more time on projects than hours they are billing, cash flow will dwindle or stagnate, leaving the organization without critical resources to cover necessary expenditures.

Lastly, cash flow problems can extend from ineffective planning. Businesses that fail to budget for expenses or plan their payments wisely can easily exhaust their resources before cash becomes available again. For all these challenges, there are some simple solutions that can help businesses better manage cash and liquidity.

Tips for Managing Cash Flow

  1. Manage Accounts Payables and Receivables
    One of the best ways to manage cash flow is to effectively manage accounts payables and receivables. First, businesses can take advantage of practices that allow them to convert accounts receivables to cash more quickly. This includes requiring payment up front for goods or services when possible or tracking aging accounts and establishing a collection schedule and rigorous practices for following up on overdue invoices.

    Accounts payable processes can also be tightened up, netting the business more in the way of available cash. Consider taking advantage of payment terms when applicable or using credit cards to float payments when it makes sense to do so.
  1. Properly Manage Inventory
    Businesses should also consider how much inventory they keep on hand. Full shelves often mean that cash is tied up in goods that aren’t being sold or aren’t being purchased at a fast enough rate to keep cash flowing.

  2. Budget and Plan Appropriately
    Of course, budgeting and planning are a business’ most comprehensive tools for ensuring consistent cash flow. However, despite its vital importance, forecasting cash is a tedious and time-consuming process when handled manually.

Because manually forecasting cash flow can be difficult, many businesses invest in technology to monitor the company’s cash balances, forecast cash flows and strategically mange AP and AR. Technology solutions designed to manage AP processes for example, can help businesses better manage payments. Solutions like these send invoices and receive payments electronically, allowing for faster receipt of cash and easier, more efficient, tracking of overdue invoices.

Cash forecasting solutions, on the other hand, track key performance indicators to proactively identify cash flow gaps and devise timeline recommendations, such as when to float payments using credit cards or other lending instruments to improve liquidity. Forecasting cash can also help you to determine when it is safest to make purchases or invest in upgrades.

While managing cash may be challenging for small to mid-sized businesses, with the right tools, businesses can effectively manage payables and receivables while employing the proper utilization of leverage to survive short-term cash logjams and even take steps to improve long-term liquidity.

Interested in learning more about how FNBO can help your business forecast its cash flow? Contact your relationship manager or Director of Product Management Matthew Carrico at mcarrico@fnni.com.

About the Author

As Managing Director, Community Banking, Douglas is responsible for leading a team that manages and develops relationships with businesses across several industries, particularly manufacturing, construction, service, transportation, and distribution. He enjoys his role at FNBO because it provides him with an opportunity to assist his community.