In turbulent and uncertain economic times, it’s more important than ever to fully understand and forecast your company’s cash flow. We’ve offered thoughts into how to build cash flow forecasts in past posts, but it’s equally as important to take actions toward optimizing cash flow. You can also put good practices in place that will preserve working capital for not only today’s economic times but well into the future. In this post, let’s review some actions you can take today to optimize cash flow in challenging times.
Establish your cash flow picture, and keep it updated on a weekly basis.
Develop a rolling 13-week cash flow forecast capturing all the cash inflows and outflows of your business on a weekly basis and keep it updated. Having a 13-week look into your cash flow will help you anticipate any cash shortfalls and will give you time to plan ahead. There’s also an additional benefit of preparing the forecast in that it helps you learn your business and see the cash flow ramifications of your business decisions.
It’s okay to keep an annual cash flow forecast, but beyond 13 weeks, the annual forecast tends to be more inaccurate. Best practice companies maintain both, and they are hyper focused on the rolling 13-week forecast for planning purposes. The best data points to use to establish the initial 13-week cash flow forecast are the recent actual cash flow history over the past few months. This can be gathered from the accounting system or from bank information. Payroll and facility costs are very projectable as to timing and amounts. Having a good understanding of contractual obligations and customer payment history will also ensure a more accurate forecast. Generally, the Controller or CFO will own the cash flow forecast and ensure that it is kept current.
No matter what your cash flow forecast projects, there is always room for improvement and optimization.
Take some steps toward optimizing cash flow.
Here are 12 ways that you can work to increase cash flow in a tough economic climate:
1. Increase your communication with your key customers.
Check in on a weekly basis especially if the customer has past due balances. Consider having the CFO or other leadership team members reach out to their counterparts at the customer, establish a relationship and follow up on open receivables as necessary. Many times, having a senior management member involved will lead to quicker payments.
2. Establish goals for your accounting department to keep accounts receivables as current as possible.
Set what percentages are acceptable in the various aging buckets (e.g., current, past due categories) and manage accordingly. For example, the goal could be 80% of receivables in the current bucket and only 20% past due. Perform a weekly review with the accounting team to track progress against the stated goals. The more attention and focus you put on this usually leads to better results.
3. Establish an early-pay discount program to encourage faster payments.
Terms such as a 2% discount on 10-day payments is a good example of this type of discount. This could be designed as a short-term policy during the uncertain economic times and decided at a later date whether to continue into the future.
4. Start requiring cash deposits or pre-payments on certain types of longer-term or larger sales orders.
Many companies do not require cash payments upfront during longer-term sales or manufacturing cycles, and they should consider doing so. You can possibly be flexible on pricing or other margin concessions in order to help implement this with customers.
5. Get your customer invoices out fast.
Do a walk-through of your invoicing process to make sure there are no hidden bottlenecks or other delays. Review your systems to make sure they are being utilized to the fullest and that there are no delays due to manual processes or breakdowns in communications between internal departments.
6. Be aware of scope creep or additional services that could be billed to customers.
Many customer projects (based on industry) have additional work that ends up being performed (for free at times) that was not outlined in the contract or considered at the point of sale. This additional work could present opportunities to bill for additional services in the form of change orders which could increase revenue and cash flow.
7. Consider invoice factoring.
Invoice factoring is the process where you sell your unpaid customer invoices to a third-party factor. I would not recommend this step unless you are in immediate need of quick cash as the cost or discount given to the factor is relatively high. However, given the need for cash and the situation this could be an option to pursue on occasion.
8. Consider selling off older or idle equipment.
Older, unused equipment takes up space and can be converted to cash. Many tech departments will have a larger inventory of older servers or unused computer equipment. Manufacturing facilities will have equipment that is no longer useful or used efficiently.
9. Clean up your inventory.
Slow moving or obsolete items can be sold at a discount in order to generate cash flow. Analyze the profitability of your products and stop selling lower margin products and loss leaders if possible. Every business usually has a lower performing or losing product offering that can be eliminated.
10. Consider leasing versus buying.
Leasing, while more expensive in the long run, in many cases will have a more positive cash flow impact in the short or more immediate term. Cash and working capital can be preserved until the economic environment is clearer. Items in the technology arena such as servers or laptops or heavy machinery on the factory floor can all be leased versus purchased. Monthly payments will be a fraction of the cost to buy.
11. Renegotiate your payment terms and pricing with key vendors.
It’s a good idea to divide up your vendors between strategic and one-off. For the strategic vendors, work out new payments plans and terms. Don’t be afraid to ask or try as many vendors are willing to work with you as they need your business as much as you need theirs. Many landlords will also be willing to work with you if you are unable to pay your rent on time.
12. Do not pay bills early.
Make sure you are taking advantage of full payment terms. Bills should be paid on their due dates and not any earlier. Check with your accounting department and review your vendor payment history and identify if there are any early pays or opportunities to delay payments further.
Final Thoughts on Optimizing Cash Flow
Hopefully the above actions provide some ideas for optimizing cash flow in the immediate term. In addition, a complete drill down into the profitability of your business is recommended. It’s important to know:
- What is the profitability of your products?
- Is profitability optimized?
- Is your labor efficiently used and is there an opportunity to streamline?
8020 Consulting excels at helping businesses answer those questions and can provide the analysis and data for you to make your business more profitable and streamline your cash flows. We can work with you and your team or do all the work for you. We have successfully performed all of the cash flow forecasting improvement actions listed above as well as business and product level profitability optimizations with many of our clients. We would be glad to do it for you and your business too.
About the Author
John is an Alumnus of Arthur Anderson and a CPA with over 25 years of diverse, hands-on financial and operational leadership experience in entertainment, technology, retail and distribution environments, including CFO, VP of Finance, and Controllership roles at companies ranging in size from early start-up through middle market as well as Fortune 500. John also has strong international management experience with time spent in the UK, Germany, India, and the Middle East. In fact, he managed global operations teams including the formation and expansion of India offshore operations and expansion of a company into the European market. Across his career, John has worked very closely with VC firms in the raising of multiple rounds of financing and negotiation of lines of credit with banks and he has helped lead companies through the successful exit / sale process.