A healthy cash flow is a must for any growing business. Late payments or no payments at all can land your business in hot water. Worse still, you could end up drowning in debt if you don’t make cash flow management a top priority.
Reducing cash flow problems and fixing existing issues is the best way to achieve positive cash flow and boost the financial health of your company. But how can you make sure that your cash flow management strategy is a booming success?
Are there any simple but effective ways to improve your cash flow management strategies? And if so, what are they?
In this article, we share seven simple but effective cash flow management strategies for busy finance teams, covering topics such as:
- What is cash flow management?
- Why is cash flow management so important?
- Common cash flow problems and struggles.
- Seven tips to improve cash flow management and grow your business.
What is cash flow management?
Cash flow management is necessary to detect how much money your company needs to survive. It identifies exactly how much is needed to keep the company afloat and cover expenses such as debts, employees’ salaries, and suppliers.
Daniel Echeverri
Why is cash flow management so important?
Cash flow management is vital to predicting how much money a company will have available in the foreseeable future.
A large part of the cash flow management process is tracking how much cash is going in and out of the company. You’ll also monitor this amount against any outgoings including property costs and salaries.
You’ll know when cash flow management is successful because it’ll present a clear picture of cost versus revenue. In turn, this makes sure the company always has enough money to pay any debts whilst remaining profitable.
Forecasting company profits, spotting healthy investment opportunities, and fixing cash flow issues are all possible thanks to cash flow management strategies. Most importantly, it helps a company avoid potential cash flow issues that could lead to its financial demise.
On that note, let’s take a look at some common cash flow problems and signs that it’s time to improve your cash flow management strategies.
Common cash flow problems and struggles
It’s extremely rare that a company crashes and burns without a few warning signs. And even if you notice any of these in your organization, it doesn’t necessarily mean that the company is doomed.
These are simply some common cash flow issues that, when they do appear, can be resolved with proper cash flow management strategies.
Here are a few of the most common cash flow issues to look out for:
- Late or missed payments piling up
- Reduced or lack of profitability
- Missing discounts on accounts payable
- Withheld investment or funds
- Negative cash flow
- A struggle to maintain financial obligations
7 cash flow management strategies for CFOs and their teams
1. Monitor where the company is spending money and build a cash reserve
You’ve always got to monitor where the company is spending money and keep a close eye on cash inflow and cash outflow both short term and long term.
One of the best places to start is in the past. Review company finances from the previous year to identify when the company was the most profitable, and when it struggled the most. From there, prepare cash flow projections and examine the company’s cash flow statements while looking out for information on debt, expenses, and savings.
Maintaining a cash reserve for a rainy day can be the saving grace your company needs when it finds itself in hot water. If your company lacks a savings account, consider creating one and building up your cash reserve.
2. Leverage technology to assist with cash flow management strategies
If you haven’t embraced technology yet in your finance role, now is the time to welcome it with open arms. New software and technology have revolutionized how finance professionals work.
With the right technology, you can uncover new ways to streamline cash flow management strategies to help you budget and project future cash flow. Rather than manually typing data into a blank spreadsheet for hours, the technology can do it all for you. You’ll be able to see all of the accounts payable and accounts receivable, helping you to manage cash flow more effectively and efficiently.
We have lots of great content about how finance teams can leverage technology and embed finance transformation within their organizations. Check out our finance transformation articles here.
3. Build credit with potential lenders and vendors during the early stages of your cash flow management strategy
This is a tip you should put into motion long before you need help from lenders and vendors. The reason is that banks and vendors are usually not very eager to lend to a company stuck in a tricky financial situation.
So, how can you get potential lenders and vendors on your side?
The solution is to establish credit with them before you need it.
As part of your cash flow management strategy, make a conscious effort to establish a line of credit for your company. And start working on this line of credit when the company is thriving.
That way, if your company ever hits a cash flow crisis, those lenders and vendors will already know you and be more open to helping you when you need it most.
Sabrinthia Donnelly
4. Identify hidden cash from the balance sheet
Did you know that some accounts aren’t included in your company’s definition of working capital? That’s why it’s a good idea to take a closer look at the balance sheet, where you could uncover hidden cash such as accrued revenue or prepayments.
Accrued revenue is common in SaaS companies. It refers to a sale that hasn’t been billed to the customer yet even though the seller has recognized the sale. Prepayments, on the other hand, are made to suppliers before a customer has received the product or service.
Significant amounts of cash could be tied up in the balance sheet without you even realizing it. So, make sure to keep a close eye on the company’s balance sheet as part of your cash flow management strategy.
5. Build a ‘strong cash culture’
One of the most effective ways to improve cash flow management is to create a strong cash culture within the company or organization.
According to McKinsey, a cash culture relies on a holistic framework built across three dimensions:
- People: Who does it?
- Structure: What does it look like?
- Process: How does it work?
The first step is to make cash a top priority for the business owner of the company and communicate its importance throughout the organization.
“Leaders signal to the rest of the organization that capital efficiency metrics (for example, cash conversion cycle) are as important as metrics related to pure profit and loss (P&L).
“A strong top-down message should be paired with capability-building programs to ensure that employees understand the importance of cash and that they have the tools and knowledge they need to make decisions based on both P&L and cash implications.” – McKinsey
6. Embed cash flow management KPIs and working capital metrics throughout the company
Despite what many people might think, the finance team shouldn’t be solely responsible for cash flow management. Other teams such as sales may need to get involved to help keep and maintain positive cash flow. If a customer is late on a payment, someone from the sales team or customer service, for example, is likely the best person to approach said customer and request payment.
Maintaining healthy cash flow should be an organization-wide effort that starts at the very top. Cash flow management and maintaining cash flow should be a regular discussion at the C-Suite, where clear accountabilities should be set.
It’s also important to define what key performance indicators (KPIs) to track and monitor across the entire organization. Then, devise a plan to help achieve targets and maintain excellent cash flow.
There are 10 essential financial performance metrics that every business should track. We've included all 10 of these vital KPIs and their calculation formulas in this handy infographic.
Sabrinthia Donnelly
7. Budget and cut expenses
Review your company’s spending habits often. You’d be surprised at just how quickly business expenses can pile up. Focus on how much the company spends on areas such as energy bills, travel, technical systems, software, and even paper and printing, etc. Relying heavily on company credit cards can stir trouble and both small businesses and enterprises alike must be careful where and how they're spending money.
When you know how money is being spent, you can start controlling it better. Create a cash flow budget to help the company keep spending within its means and avoid overspending. If cash flow isn’t doing great, look for areas where you can minimize or cut expenses.
Are there certain expenses that the business can do without? What can be cut without impacting the business negatively? Identify areas where the company can reduce its spending, create a budget, and stick to it.
Key takeaways
1. Prioritize building a cash reserve to fall back on in times of need.
2. Leverage technology where possible to help streamline cash flow management strategies.
3. Establish a line of credit for your company while it's booming, not when it’s in the middle of a financial crisis.
4. Keep a close eye on the company’s balance sheet for missed payments and opportunities to increase cash flow.
5. Strive to build a strong cash culture within the company that interconnects and weaves throughout the organization via its people, structure, and processes.
6. Identify relevant KPIs to help improve cash flow management, and make sure everyone in the company is aware of what they are, why they’re important, and how to improve them.
7. Find areas where the company can reduce its spending, cut expenses where possible, create a budget, and stick to it!
Want to continue this conversation with other CFOs and finance professionals?
Sign up for our Finance Alliance Slack community (it's free!).
