Cash management is the lifeblood of any business. It can make or break any company regardless of how great the product or service is. In fact, cash-flow related challenges are the reason 82% of small businesses fail.
Cash flow is a metric that every company should track and manage carefully. Whether you have decided to proactively work to improve cash management or have found that you and your company may be in crisis mode, here are some considerations for improving your cash management.
6 Steps for Improving Business Cash Management
Below are five areas to consider when improving your cash management strategy.
1. Review Your Accounts Receivable Processes
Analyzing your accounts receivable is one of the first steps a company can take in improving cash management.
First, standardize your billing process. Don’t reinvent the wheel every time you make a sale. When you use the same process each time, there is less confusion, no time wasted, and your invoices will go out faster.
Second, make it as easy as possible for clients to pay you. Do not require someone to call or make a payment in-person unless absolutely necessary. The easier you make it, the faster you will get paid. There are hundreds of available software options available to support this.
Consider offering incentives. In some cases, you may benefit from offering incentives for faster payments, in-advance payments, or in-full payments. Run a cost-benefit analysis with your finance professional to determine what works best for your company.
Finally, make sure you have a process in place for dealing with delinquent payments. Some companies let invoices go long stretches of time without being paid–and some don’t take action when the payment isn’t made at all. This habit cuts into your cash and your profit margins. Instead, make sure you have a reasonable process in place to encourage payment with delinquent accounts and to take action, when necessary, if payment isn’t rendered.
2. Improve How Your Customer Contracts Work for You
Next, analyze your customer contracts. Do your current agreements make sense for your cash flow, or are you allowing too much time between receipt of products/services and payment? Remember that too much time between a service being rendered and the time you get paid is akin to providing an interest-free loan to the client. See what strategies you can take to get the money into your hands faster so the money you earn can work for you–instead of for someone else.
If your business often breaks down payments on large purchases into monthly or quarterly payments, ensure you have a reasonable process for vetting clients and keeping track of their payments. Consider credit checks, which may incur a small cost upfront, but may save you money, time, and stress in the long run.
3. Reevaluate Accounts Payable
In business, everything is negotiable. This means that even your accounts payable can be an important part of optimizing your cash management.
Take some time to reanalyze your vendor contracts. In particular, make sure you are timing your payments correctly. You want to try to avoid sending out money before money comes in, so check your due dates and grace periods. This is a particularly important consideration for manufacturing or construction companies that often require the purchase of upfront materials or inventory before getting paid by a client.
Many vendors and suppliers are willing to renegotiate contracts to maintain your business and to ensure they get paid. Explore what parts of your contracts may make your cash work better for you, including increasing time to pay or moving payment dates to a time that better fits your cash flow schedule, taking advantage of prepayment discounts, etc.
It never hurts to ask for a lower price or a discount. Your suppliers may say “No,” but you never know until you ask.
If it applies to your industry, look into forming a buying co-op with other companies. Buying in bulk is usually less expensive due to the significant discounts offered.
4. Reevaluate Spending and Costs
There are three fundamental questions to ask when reevaluating your company’s output of cash.
“Is this necessary right now?”
“Can I get a better price?”
“Can this be done more efficiently?”
Start with your company’s spending. These questions will help you determine what can be deleted, what can be improved, and what needs to be left alone. This type of spending includes office supplies, travel expenses, food, and entertainment, etc.
Next, double-check both your production costs and operation costs. Just by asking these questions, you can lower your COGS, save on bank fees, maybe even save on your rent or any loan payments.
Check your inventory levels. If you are carrying too much inventory or are holding on to low-selling products, you are hurting your cash flow. Check your sales data and learn which are your highest revenue-generating products and which products are costing you the most money, then adjust accordingly.
5. Do a Product Line Analysis
Fiddling with pricing and product lines can be scary for many companies. The thought of scaring away current or future clients with a poorly executed price increase or product line change can be overwhelming. However, failing to evaluate your true cost of goods and profit margin for each product leaves many unaware businesses with products that actually lose money or drive very little value.
It’s important to perform regular product line analyses. Track your true cost of goods sold to determine your profit margin on each specific product or service and take the time to compare your costs and prices with your market or industry. Are you charging too much and losing potential business or are there areas where you’re unnecessarily underpricing yourself? If so, what can you do to resolve this issue?
6. Don’t Neglect Your Sales & Marketing
Don’t let a focus on cash flow make you neglect your sales and marketing. Before making sales or marketing cuts, be sure to do a thorough analysis to make sure the cuts won’t have detrimental effects down the road.
In addition, it’s important to ensure you don’t become complacent with your sales and marketing processes. Just because a sales process or marketing campaign worked in the past doesn’t mean it is working now. Make sure you have a process for measuring efficacy and that you review these numbers regularly and make adjustments as needed.
Final Thoughts
There’s a reason CFOs and finance professionals will say “cash is king.” It is the lifeblood of any company, providing the capital to continue operating and growing the business. If you have specific questions about your cash management or are interested in engaging with a CFO consultant, please feel free to reach out.
About the Author
Todd Kemp
CFO
Todd Kemp is a high-level CFO with significant experience in private-equity-sponsored as well as publicly traded corporations in the manufacturing, distribution, and B2B services industries. Todd is also experienced in merger & acquisition valuations and due diligence, as well as managing financial teams of varying sizes.
You may also be interested in...
What is a Capitalization (Cap) Table and Why Does it Matter?
What is a Cap Table? Capitalization tables, commonly called “cap tables,” are highly useful spreadsheets maintained by companies that have multiple owners or investors. Cap tables are especially important for private companies at startup and in the early stages of the...
Benefits of Finance & Accounting Staff Augmentation
Many companies experience times when they find their accounting departments short on staff or short on expertise. Sometimes emergencies and financial needs arise that are beyond the capability of their financial personnel to address. This is particularly true in times...
Qualities of an Effective Profit & Loss Report
A Profit and Loss (P&L) Report, also called a Profit and Loss Statement, is a key financial document that details a company’s income and expenses over a specific period of time. This time period is typically a month, a quarter or a year. Depending on company needs...
What Is a Quality of Earnings Report?
When a business sale, acquisition, or major investment is contemplated, one important step in the due diligence process is the generation of a Quality of Earnings report, sometimes abbreviated as QOE. Even though a company may have strong financial statements, those...
Complete Guide to Accrual Accounting
There are two methods of accounting: cash and accrual. In cash accounting, transactions are recorded when payment occurs. In the accrual method, revenues and expenses are matched and recorded at the time the good is delivered or the service is performed, regardless of...
3 Things to Know Before Choosing a Supplier
Choosing the right supplier for your business can be complicated, especially if a large portion of your product comes from a single company. For many companies, supplies are secondary only to labor in their expenses. But choosing the right supplier has even more...
A CFO’s Role in Strategic Decisions
In every company, there are important decisions to be made on a daily basis. Some decisions are mundane and have only short-term consequences. Others are strategic and can affect the company’s performance and profits for years. Too often, these critical decisions are...
CFO Hiring Guide: Analyze Your Needs & Maximize Value
Whether your business is a startup or an established enterprise, you need a strong, agile financial team with a highly competent leader. Some companies think they can get by without a Chief Financial Officer (CFO) until they start preparing to go public. Other...
Financial Expert Roles & Responsibilities
It’s not uncommon to have difficulty differentiating between the main financial professionals. Not only are the names similar, but they are also often unintentionally used interchangeably. However, despite how the titles may be used colloquially, there are distinct...
Choosing the Right Vendors for Your Business
Nearly every business requires supplies and services. To keep your company moving forward smoothly and to ensure optimum profitability, you need to find vendors who are trustworthy, consistent, and correctly priced. An ideal vendor is more than just a supplier; they...
How Much Does a Virtual CFO Cost
A virtual CFO, also called a VCFO or fractional CFO, is a consultant or company that provides CFO services to one or more businesses on a part-time or ad-hoc basis. In the past, a true CFO was usually a highly paid, full-time employee that only large corporations...
What Is Gross Profit and Why is it Important?
Gross profit is one of several key profitability metrics that help companies evaluate their financial health. It is necessary to determine gross profit before you can calculate other important figures such as net profit, EBITDA, and the company’s bottom line. Gross...
