Updated on: April 3, 2023
Written by: Alice Ko, CPA, CA
Cash flow management is the practice of managing, analyzing, and in most cases, optimizing the inflow and outflow of cash. By proactively monitoring your cash, you will (hopefully) always have enough cash on hand and a strong working capital ratio. Cash management tactics may include tasks like budgeting cash outflows, forecasting future cash inflows, and implementing strategies to improve cash flow, such as reducing expenditures or increasing your income.
Cash flow management in business uses the same definition as above, but applies to a company. A company must proactively manage its cash to meet financial obligations, make strategic investments in the right projects, and take advantage of new business opportunities.
At a company level, cash flow management should always be included in your business plan! This may involve tracking the sources of cash (revenue, loans, or third-party investments) and the uses of cash for expenses, debt payments, and capital investments.
If you are a small business owner, I imagine cash flow management is a key priority, if not the top priority, for you. Your strategy and tactics for managing cash flow will be different depending on the stage of your company, how much financing you have, and what habits you’ve put in place to ensure positive cash flows at all times. Different cash flow management tactics may include:
- Reviewing your monthly cash flow statement from your accountant and reviewing the amount of outstanding accounts receivable on hand in your accounting software
- Checking that you haven’t overextended your business line of credit
- Reviewing your bank account balances every single day
- Monitoring your cash flow projections to make sure you have the right amount of cash in the bank
Whatever your process is, the most important part of business health is keeping your business finances healthy and making sure you have enough cash on hand to run the business.
Money may cause more problems but... who doesn’t want more cash?
With the recent banking crisis in Q1 2023, dwindling confidence in banks, and rising interest rates from the Federal Reserve, cash flow is top of mind for companies and leaders everywhere. Like Alok Ajmera writes, “cash retakes its crown.”
- Deloitte recently surveyed top finance executives in North America and released the findings in CFO Signals for Q1 2023. The research showed that one of the most priority items for finance leaders is “strengthening liquidity and cash management.”
- Intuit’s study found that 61% of small businesses around the world have challenges with cash flow and almost 1/3 of respondents have challenges paying vendors, repaying loans, or even making payroll because of cash flow issues.
In most cases, all businesses will at one time or another face cash flow problems when they fail to recover their accounts receivables on a timely basis - or at all. If your business does not have sufficient cash to pay bills on time, this could impact your business’ creditworthiness, which is not good for your business in the long run.
This is why it’s essential for companies to proactively streamline smart strategies to keep their cash flow running positively and also improve it.
What should you do if you have a cash flow shortfall?
Some experts like Dan DeGolier, founder of Ascent CFO Solutions, believe that “cash flow forecasting, runway, and burn rate are more critical now than ever. Companies have to get even sharper about understanding their drivers and retaining cash.”
Prioritizing your bookkeeping and understanding your financial metrics is essential to understand your cash reserve and where you stand.
Other experts even recommend securing financing before you’re in a negative cash flow position. If this is something you are considering, here are a few strategies and ways to think about lenders to help you maintain the financial health of your business.
If you have a few large invoices from specific customers, you may want to consider selling your invoices to a factoring company to receive immediate cash in the short-term. Factoring is a popular shortcut to getting that cash from your receivables upfront. If you consider this option, note that factoring comes with cons, including aggressive collections techniques from the factoring company. Consider modern-day factoring alternatives that offer the same benefits, but less risk.
Trade credit insurance is a type of insurance you can purchase to protect yourself against the risk of non-payment by your customers. One of the main pros of this type of insurance is the proactive cash flow management it can provide by giving you a safety net just in case your customers do not pay you. Additionally, it can give you the confidence to work with new customers as you can take more risks. However, trade credit insurance and accounts receivable insurance can also be costly and they may not always be available for your type of business.
Technology has enabled the development of innovative new ways to help small businesses take better control of their cash flow management. For instance, some fintech solutions embed themselves into a company’s in-house processes so the business can make better risk decisions. This can unlock your ability to manage your cash flow better.
For instance, Resolve is an example of fintech software that also offers services to help with cash flow:
Wish you could get paid faster? Wouldn’t it be nice if your invoices were paid in 1 day rather than 30 days? Get the cash upfront. Take advantage of merchant cash advances from companies like Resolve that offer factoring-like services (but better). Perhaps you’ve considered automating your AR so you get paid on time. Fintech exists for that too. Companies like Tesorio automate your accounts receivables reminders, and companies like Resolve help you manage slow collections with being your “payment chaser” and “AR team on team”.
Business credit cards are great for low-value and low-cost goods. Plus, you earn loyalty points and some cards even give you a cash-back option! However, the high interest rates on credit cards don’t make this an attractive option if you’re unable to pay off your credit card on a timely basis. Also, credit cards have a maximum credit limit so these aren’t that useful for higher cost items such as equipment or higher volume goods.
Cash flow loans and SBA loans are a popular form of B2B financing for small businesses. However, they can be challenging to obtain if you do not meet the strict requirements to qualify for a loan. The rising interest rates on loans also make it an expensive option. Some loans may even require personal guarantees.
A line of credit offers a lot of flexibility as you can use the funds (up to a certain limit) when you need it. You only pay interest on what you borrow and you can use the funds at any time (unless they take it away from you). That’s why a line of credit is known as the fairweather friend! There are cons though:
- While it may be tempting to use a line of credit, there is risk of drawing too much than you can pay back, and not being able to pay back what you owe. Make sure you are strategic about when you draw on your line of credit.
- Although a line of credit often has lower rates than a credit card, the rates can potentially be higher than other types of loans.
Equipment leasing is a type of financing that let companies access and use the equipment they need without having to pay for it all at one time, or own the equipment. Instead, leasing allows a company to make monthly payments over a duration of time.
Operating Leases: An operating lease is treated like a rental. Payments for assets are treated like typical operational expenses. The company that is leasing doesn’t own the asset. This means the asset being leased stays off the balance sheet of the company leasing the assets.
Capital Leases: A capital lease is more like a loan. The asset being leased is treated as being owned by the company using the assets, so it is recorded as an asset on the balance sheet of the company leasing the asset. Ownership of the asset typically transfers over to the lessee at the end of the lease term.
Leasing may sound like a bizarre strategy since leasing equipment or supplies can sometimes more expensive than purchasing the equipment outright. Purchasing expensive equipment has its pros since it can be capitalized on the balance sheet as an asset, rather than a full expense. This is why capital purchases are also more attractive for companies that focus on optimizing net income or EBITDA.
Purchasing supplies is also beneficial if your business enjoys timely payments on your sales and you have enough finances to maintain day-to-day cash streams for operations.
If this is not the case, your company may face serious cash flow problems as you will always be waiting for your invoices to be paid by your customers. This is why leasing, and paying your accounts payable in the form of smaller increments (rather than leasing) can help you not only maintain more cash flow but also improve it. You can write off lease payments on your tax return because they are considered business expenses, thereby reducing your taxes payable.
Most businesses sell their products on net terms.
This means that you may not receive any cash payment from your customer until 30 days, 60 days, or even 90 days after the invoice is sent out!
When you offer payment terms, you essentially have to act like a bank as you essentially “loan” your resources to your customers.
Offering discounts on early payment is an option that can be tremendously advantageous when it comes to improving your cash flow. I mean, everyone likes incentives, especially your customers!
Giving your customers discounts on early payment of their invoices is a strategy, that not only encourages them to pay their bills on time but also benefits you as you get your cash sooner than before.
This is one of the simplest ways you can keep your business’s cash flow coming in predictably.
Take advantage of GPO (group purchasing organizations). GPOs like Una provide businesses access to pre-negotiated contracts to save money, time, and effort. Any company can join a GPO to leverage this collective buying effort. This is a way to access substantial savings on the goods and services you may need to run your business and save on cash.
The greater the number of buying companies in the pool, the greater the discount they will get! Sound too easy? It might be. But using a GPO is a simple way to get big discounts from large firms selling goods in bulk. Learn more about GPOs here.
Review your inventory and take note of the products and goods that are not selling at the same pace as your other products. Slow-moving inventory ties up a lot of cash! Getting rid of this inventory instead of continuing to purchase more is another way to limit your cash outflows.
As a buyer, why not ask for terms from your suppliers? Ask for the “buy now, pay later” solution! Ask your vendors to offer you payment terms. It may not always be a yes, but it doesn’t hurt to ask. In fact, offering net terms online is an industry standard and is a very popular option in this digital world, so most of your vendors will likely say yes.
Note that some vendors may offer you terms of 30 days while others may offer 45 or 60 days. 90 days are usually reserved for certain industries or for very loyal customers.
This is one of the easiest things you can do to improve cash flow. Try to maintain regular and friendly communication with your suppliers to land better vendors! Plus, if you purchase more volume upfront or purchase more frequently, they are more likely to give you a discounted price in return. This can help you decrease your cost of goods which has both a positive impact on your cash flow and your margins!
This strategy may seem easy, but it often scares business owners! The common fear is worrying that raising your prices might lead to loss or reduced sales. However, there’s nothing wrong with experimenting with your pricing strategy as it might be helpful in finding the perfect price where you can maintain customer loyalty while earning a bit more.
This one is extremely important if you deal with customers who do not like paying for their goods upfront or if you operate in an industry that normalizes terms. Giving credit to customers is a practice that should not be taken lightly. Make sure you conduct proper business credit checks.
In a nutshell, cash is king and it will make or break your business operation. It is essential that you have the right cash flow management strategy in place to help maintain the cash flow of your company. Whether you lean on traditional forms of cash infusion like your line of credit, business loan, factoring service or a newer fintech solution like Resolve, ensure your strategy matches your business needs.
Want to get paid in net 1 instead of net 30? Take advantage of Resolve’s free trial and change your accounts receivables today.