Maintaining a positive cash flow could be considered an art, but it can also be a businesses’ biggest challenge. If you’re feeling the pressure of keeping all the key factors in alignment, you’re not alone. It can be difficult to decipher which have the biggest impacts and what changes may be worth making to manage cash flow for your company. 

Assessing those key factors can be overwhelming, but when you break them down, an easy-to-follow guide emerges. We’ve cracked open each step and demystified the way to a positive cash flow. These five elements will help you crack the code: 

1. Receivable management 

Businesses can help ensure a steady cash flow through efficient receivable management. According to our outsourced accounting pros, this comes down to these three factors: 

• Establishing clear payment terms: Clear payment terms upfront helps prevent disputes and delays in getting paid. Clarity and specificity are key to preventing clogs. Offering incentives for early payments and enforcing penalties for late ones are also helpful to keep cash collection on schedule.
• Conducting prompt invoicing: Sending invoices immediately after a service is rendered or a product is delivered while it’s still top of mind for everyone minimizes delays in receiving payments. It is easy to let the timing of invoices slip, so automating this process may be helpful.
• Setting up automated billing: The use of automated billing systems can make this process more efficient and free up valuable time. These systems can also send friendly reminders as due dates get closer, which reduces overdue payments. 

2. Controlling payables

Managing outflows effectively ensures your business is maintaining liquidity, prioritizing payables and keeping vendor relationships healthy. Here’s some tips to controlling payables efficiently: 

• Review payment terms: If you haven’t done so, take some time to evaluate your payment terms on all your current transactions to see if there are any early payment discounts that might work for your business.
• Prioritize payments: Categorizing and prioritizing payables based on impact and urgency is important when it comes to meeting obligations without straining cash flow. Every organization is different, but some things that should be near the top of the list are payroll and taxes, rent and utilities, critical vendors and secured debt.
• Streamline approvals: A well-structured and implemented approval process reduces delays and prevents unnecessary payments. Standardization of this process and simplifying its workflow ensures it sticks and is always followed.

Even with a great process, an automated system will be there for you if something falls through the cracks. This will help to streamline your processes, run regular reports automatically, flag duplicate payments and assist with other tedious functions. 

3. Line of credit access 

A reliable line of credit provides flexibility in managing short-term cash flow fluctuations, which is normal for any business. Here are some best practices to keep in mind:

• Credit Lines: It’s a good idea to proactively establish credit lines with banks to bridge temporary cash gaps and ensure smooth operations. This allows businesses to draw extra funds they need without delay to avoid any interruptions.
• Communication with lenders: Practicing open communication with lenders is essential if you want to maintain access to those credit lines, as well as win better terms and larger limits if needed.
• Cost of capital: Evaluating the cost of capital might seem like a given, but businesses need to ensure there are routines in place so that those costs are checked and assessed regularly. Cost of capital can fluctuate, so routinely evaluating the cost of debt and equity is a healthy practice. 

4. Establishing key performance indicators (KPIs)

How do you look for potential opportunities or downfalls in your cash flow ecosystem? These KPIs will help you measure and optimize that ecosystem:

• Cash Conversion Cycle (CCC): This measures the time it takes for a company to convert inventory investments into cash flow from sales. You want to land on a shorter CCC, meaning your capital management is efficient and profitable.
• Days Sales Outstanding (DSO): This is the average number of days it takes to collect payments after a sale. This is how you can tell if you’re handling your accounts receivable and cash flow efficiently. It’s ideal to maintain a lower DSO through faster collection of receivables, which translates to better liquidity and cash flow.
• Days in Inventory (DII): This reflects the average of how long inventory is held before being sold within a certain number of days. The lower your DII, the faster your turnover. It is important to keep in mind that with many businesses, there is seasonality and a wide range of industry norms.  

5. Stress testing

Last on the list, but most important, is assessing your company’s financial resilience. Thinking up the most adverse scenarios your business could face is not fun, but it is necessary. Testing those scenarios and analyzing their results will advise you as you build plans to avoid those risks altogether. Areas to consider include:  

• Reserve Funds: Establishing reserve funds as a cushion, specifically for unexpected expenses, revenue short falls, market failure or any number of worst-case scenarios, should be at the top of your list. We recommend anywhere between three to six months of operating expenses be diverted to this fund. Whenever you experience a growth in your business or a change in risk exposure, adjust as needed.
• Identifying Limits: Identify your limits by finding any breaking points through simulating conditions like reduced sales, delayed payments and increased costs. This can help to expose any vulnerabilities, whether it’s relying too much on a few big customers, fixed costs, etc., which can then be addressed.
• Cost Cutting: Once you’ve completed those steps, it’s time to create contingency plans in response to the worst-case scenarios you’ve simulated. There are many ways you can structure cost-cutting plans, and every plan looks different. 

Businesses should implement these cash flow strategies to maintain financial stability, optimize operations and prepare for future growth or future challenges. It’s not always easy to carve out time for things like this, especially if business is going well, but it’s worth the time and money to spot your strengths and weaknesses. 

There are a lot of overwhelming options, and Doeren Mayhew is here to help. Contact us today to explore these cash flow strategies for your business.