Managing cash flow can be a challenge for business owners at the best of times — but it’s especially challenging in times of economic uncertainty. Expenses stay high but your cash collection may vary, making it difficult to know how much money is entering and exiting your business.
We’ve summarized six tips for managing your cash flow to help your business navigate periods of uncertainty with confidence. However, managing your cash flow is only the first step — and we’ve also included several tips to develop or refine your working capital and cash flow management strategy. This comprehensive approach can help make your business more resilient and support its growth in today’s challenging economic climate.
What is cash flow management?
Cash flow management is the process of monitoring the money that is coming into and leaving your business. It is crucial to effectively manage the timing of your collections and cash outflows to maintain a healthy and sustainable cash balance. This enables your business to pay its bills on schedule, weather unexpected expenses, and invest in opportunities for further growth.
What are the signs of poor cash flow management?
There are several indications that a business may not be effectively managing its cash flow, including:
Struggling to pay bills
One sign of poor cash flow management is when you’re struggling to pay bills on time. This suggests you do not have the sufficient cash reserves required to meet financial obligations.
Frequent cash shortages
Poor cash flow management can lead to frequent cash shortages, creating difficulties in meeting daily expenses or unanticipated costs. This means you have to rely on credit, submit late payments, and operate ineffectively.
Increasing debt and interest payments
Poor cash flow management causes you to rely heavily on borrowing or credit lines to service debts and cover operating expenses. However, acquiring high levels of debt leads to substantive interest payments that strain cash flow and impact your company’s financial health even further.
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How to improve cash flow management
Effective cash flow management is essential to keep your business financially stable in times of economic uncertainty. It empowers you to make informed decisions, seize new growth opportunities, and achieve your long-term goals.
However, managing your cash flow can be challenging — and you may be wondering where to begin. These six tips can help you get started:
1. Keep an eye on the future
Predict how much money your business will receive and how much it will need to spend in the next several weeks and months. Planning ahead will help your business avoid cash shortages.
2. Control your expenses
Review your expenses to determine how your business can reduce unnecessary costs. This may include negotiating better deals with your suppliers or exploring other ways to save money.
3. Monitor what you’re owed and what you owe
Follow up on unpaid invoices to ensure your customers are paying you on schedule. Prioritize paying your own bills on time to avoid late fees and maintain good relationships with your suppliers.
4. Balance what you own and what you owe
Find the right balance between the money you have in hand (cash, inventory, etc.), and the money you owe (bills, debts, etc.) to ensure you have enough money available when you need it.
5. Analyze your cash flow frequently
Examine your cash flow statements to identify trends, areas when you can improve, and any potential issues before they occur.
6. Consider your financial decisions
Evaluate how financial decisions such as taking out loans or investing money will impact your cash flow. It is essential to ensure you have enough cash available to cover your daily expenses before pursuing growth opportunities.
What’s next? Improving your working capital and cash flow cycle
You’ve taken the first six steps to start managing your cash flow — and now you may be wondering what’s next. Businesses are facing numerous challenges in today’s economic climate, including rising costs, softer consumer demand, and increased interest and rent expenses.
Developing and refining your working capital and cash flow management strategy is critical to help you overcome these obstacles and create a foundation for sustainable business growth and resilience.
Some of the key benefits include:
Reducing interest expenses
Improving your working capital and cash flow management allows your business to generate cash more quickly. This enables you to use your own funds to meet your financial obligations instead of relying on loans — reducing the impact of high interest rates.
Boosting investor and stakeholder confidence
Better working capital and cash flow management helps optimize your internal resources and minimizes the need for external funding. This enhances control on the cost and timing of funding and increases confidence for investors, lenders, trade partners, and employees.
Positioning your business for growth
Improving your working capital and cash flow management helps enhance the existing competitiveness of your business and positions it for further growth. It also helps improve cash and resource utilization to support business expansion.
Improving visibility and resilience
Better working capital and cash flow management can help increase the visibility and control of your cash flow — enabling better planning for operational obligations and financial liabilities. It can also create an effective buffer against seasonal fluctuations in demand and external shocks, making your business more resilient.
What is the cash conversion cycle?
The cash conversion cycle is a crucial metric used in working capital and cash flow management. It combines the three core pillars of your company’s working capital, including:
- Accounts receivable aging days
- Inventory turnover days
- Accounts payable days
A shorter cash conversion cycle reflects your business’ efficiency in selling inventory, collecting receivables, and paying suppliers. Decreasing your accounts receivable and inventory levels, as well as increasing your accounts payable while maintaining a healthy relationship with your vendors, can help you achieve a shorter cash conversion cycle.
How to improve your working capital and cash flow management
Effective working capital and cash flow management are crucial to increase business resiliency in today’s turbulent economic climate. A strategy customized to the unique needs of your business can help support its success.
A customized strategy focuses on three levels:
- Analyzing key cash flow indicators at a summary level
- Planning for risks and changes at the account level
- Improving the cash conversion cycle at the finance operational level
It may be necessary to seek the support of a professional to assist you with conducting an analysis and developing a plan to improve your working capital and cash flow management. They can also provide support as you implement your solution to help your business achieve success.
Conduct an analysis
Analyze your current cash flow and working capital system to identify quality and efficiency gaps. This includes the calculation of your cash turnover and reviewing your inventory, debt and financing, and accounts receivable and payable reports.
Develop a plan
Create a customized plan to improve your working capital and cash flow management. Your plan may include cash and working capital forecasts. It may also involve a breakdown of cash utilization and strategies to improve visibility and cash cycle performance.
Implement the solution
The next step is to put your plan into action. It is important to continually monitor your cash flow to determine if your plan is performing successfully and to facilitate ongoing conversations with your stakeholders throughout the process.
What does improving cash flow management look like?
Imagine a business owner has recently opened a new bakery. While its products were in demand and it had a growing customer base, the business often struggled to pay its suppliers on time, causing a strain in their relationships. Additionally, it started to rely on credit cards and short-term loans to cover unanticipated expenses — leading to higher interest payments.
The owner of the bakery recognized the need for change and decided to implement new cash flow management strategies. They got started by monitoring their cash inflows and outflows to anticipate periods of low cash flow and reduce unnecessary costs.
The bakery also began to send friendly invoicing reminders to customers and implemented a follow-up system to ensure prompt payments. Additionally, the owner reduced excess inventory to free up more cash, reviewed cash flow statements to identify patterns such as seasonal fluctuations in demand, and planned for anticipated cash shortfalls or surpluses.
Through these changes to its cash flow management strategy, the business reduced its reliance on credit and ensured it would always have enough cash available to cover its expenses. This improved its relationship with suppliers and attracted new customers through its reliable service, empowering the bakery to thrive.
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Take the next steps toward success
If you need help making sense of your numbers, contact a member of MNP’s Private Enterprise Consultingteam. We can help implement a customized cash flow management plan for your business. The right strategies and advice can empower your business to overcome obstacles and navigate uncertain economic headwinds with confidence.
