Best Practices for Managing Cash Flow

Monitor Your Expenses

It’s essential to know where every penny of outflow is headed.

Categorize your spending – G&A, R&D, Sales & Marketing, Operations, and COGS – and establish a rigorous process to track expenses on a monthly basis. Keep an eye on the percentages for each category. Do those percentages make sense? You should also benchmark spending against your competitors and other companies at the same stage in the business lifecycle to determine where you might be missing the mark.

And remember every cent you spend detracts from your profit margin, so scrutinize all of your expenses, even those that might seem insignificant, and carefully consider the cost-benefit of each to your business.

Forecast, Forecast, Forecast!

A financial forecast leverages your company’s historical performance, along with your market and benchmarking data, to create month-to-month cash flow projections and strategies based on both best-case, worst-case, and expected-case scenarios. Consider including metrics like operating cash flow ratio, free cash flow and days sales outstanding (DSO) to ensure you always have a clear picture of your cash flow position.

Ideally, your forecasts will serve as a kind of rolling budget to guide financial decisions moving forward. Taking the time to create realistic forecasts will also aid you in planning for future resource allocations and inspire trust and confidence should you need to approach lenders and investors for capital.

Manage Your Supply Chains

How your business manages its supply chain directly impacts its ability to manage cash flows:

• Understand demand fluctuations to more effectively plan production and minimize inventory on hand.
• Get a handle on how many suppliers you have and where they’re located, then look for opportunities to reduce costs associated with planning and executing supply chainprocesses.
• Identify potential risks and plan appropriate responses
• Negotiate or renegotiate supplier terms. Look to score early payment discounts, especially with strategic partners that ensure your business is able to operate.

Keep Adequate Working Capital On-Hand

It’s important to always have some liquidity available to pay certain expenses up front, navigate seasonal lulls, and manage market downturns. A few ways to avoid cash shortfalls include:

• Only paying bills on their due dates, unless a vendor has offered an early payment discount.
• Providing early payment incentives to your own customers to encourage quick turnaround on outstanding invoices.
• Monitoring spending closely to ensure your company’s working capital isn’t exhausted.

Build an Emergency Fund

Don’t assume your business will always be able to fall back on profits, especially during slow seasons or market downturns. Depending on your organization and its needs, aim to have cash reserves that will cover between three and six months of operating expenses. You should prioritize cash reserves ahead of a growth initiative to ensure your company always has accessible emergency funds on hand if and when they’re needed.

Grow Strategically

Of course you want your business to grow, but a too-rapid expansion can quickly deplete resources and leave your organization without the working capital needed to cover day-to-day operations, not to mention the cash reserves required to survive a market downturn or other emergency. As you plan for growth, be sure your business has the sales and financial cushion to support that expansion.

Borrow Before You Need To

Every business needs access to financing at some point, but the best time to arrange for that financing is before you need it. By applying for a business line of credit when things are going well, you minimize the potential for rejection and are in a better position to negotiate favorable terms. Then you can rest easy knowing your organization has the lifeline needed to safely navigate its slow season as well as any market downturns that might be on the horizon.

Establish Accounts Receivable Policies and Procedures

Issues with accounts receivables aren’t just a nuisance; they’re a common source of cash flow problems. That’s why every organization needs to have consistent accounts receivable policies and procedures in place for issuing invoices and to ensure customers pay in a timely fashion. Never assume that your customers automatically know what to expect.. Be absolutely clear about your payment terms by noting “payment due within 30 days” or “payment due upon receipt” on every invoice. Be sure you also have “soft” collections plans in place for slow-paying customers, as well as firm guidelines for turning accounts over to a third-party collections agency in the event one of those slow-payers goes delinquent.

Optimize Your Accounts Payable Workflow

An optimized accounts payable workflow is essential to ensure your business pays its bills on time, maintains good relationships with vendors and suppliers, and is always able to take advantage of the best credit terms available.

It should be easy for your team to prioritize and pay invoices, keep supplier information up-to-date, and track important key performance indicators like Cost Per Invoice, Payment Accuracy Rate and Days Payables Outstanding (DPO). An optimized AP workflow should also have a reliable method of fraud detection, firm access controls, safeguards against duplicate payments, and a method for tracking and resolving disputes quickly.

Conduct Regular Financial Audits

Analyzing your company’s accounting records, cash holdings, and other sensitive financial data will give you a clear picture of its finances and ensure your business records accurately reflect its financial condition. Regular financial audits will also minimize the potential for fraud and mismanagement, while also helping you to identify processes and controls that need to be improved.

Call In Experts

Optimal cash flow management consists of many moving parts, and it can be difficult to give each the attention it deserves, especially when you’re already enmeshed in all of the other activities that go into running a successful business.

If you and your team are coming up short, it might be time to consider outsourcing your financeand accounting functions to experts capable of prioritizing cash flow management above everything else.