Cash Flow Management Made Simple

No matter how much profit a business generates, poor cash management can lead to disaster. In fact, a recent study found that 82% of small business failures can be attributed to poor cash flow management, a factor more impactful than too little starting capital or even lack of a well-developed business plan.

The hardships created by the recent pandemic reiterated the importance of effective cash flow management, as many businesses learned of critical flaws in their plans once it was too late. Managing cash effectively means avoiding some common mistakes, but what many managers don’t realize is that proper cash management can generate new revenue.

Accurate forecasting can prevent overinvestment in capital or inventory.

One of the most common cash management mistakes that businesses make is overinvestment in inventory. Businesses looking to enter their next growth phase or cut costs will often purchase inventory in bulk to save on per-unit costs. For some companies, this can be a valuable strategy, but for others, it can create difficulties in meeting liabilities, especially if the inventory isn’t churning.

Another common mistake is overinvestment in capital. Many businesses require substantial capital expenditures to obtain the equipment needed for their operations, but overspending on capital can be a critical mistake if it restricts the business’s ability to meet daily obligations. That is why it’s important for managers to understand the ROI and payback period for any large investments, and that understanding requires proper planning and forecasting.

Creating accurate and sufficient forecasts can save your business from potential cash strains that can result from overinvestment. Accurate forecasts help managers determine the proper timing for inventory expansion or capital investment, and they can aid in determining the best financing options for major purchases. By developing accurate sales forecasts and keeping just enough inventory on hand, managers can be confident that their free cash flow will meet their operating needs.

Overextending credit to customers can create cash flow bottlenecks.

For many organizations, offering credit cards or lines of credit to clients is an effective way to attract more customers and sales. However, those companies who rely on credit purchases must focus a great deal of attention on managing receivables to prevent bottlenecks in their cash flow.

Slow paying invoices and bad debts are natural side effects of offering credit to your customers, so if your company relies on credit sales, it’s essential that you have a strong credit monitoring program. After all, knowing when one of your significant customers is having financial issues before it impacts your business can be the difference between survival and failure.

Another way to maintain healthy receivables is to offer discounts for customers who pay their invoices sooner. Every customer that pays a week early can offset another who pays a week late. By incentivizing customers to pay early, you can reduce your “A/R Days,” which in turn strengthens cash flow.

Seasonal demand creates significant challenges with cash flow management.

Businesses that are highly seasonal can experience considerable fluctuations in their cash flow throughout the year. This may leave them flush with cash during the “on-season” and struggling to meet obligations during the “off-season.” Tackling these issues also requires accurate forecasting and budgeting, but these companies may also benefit from diversification.

For these seasonal businesses, it is important that a large cash buffer is built up during peak season to finance the off-season. Cutting all unnecessary expenses and creating an accurate forecast should allow viable businesses to weather the off-season. Still, this process can be a challenge for even the most seasoned managers.

Also, picking the right time to invest or expand can be challenging for organizations with seasonal demand. These businesses do not want to disrupt the peak season, but they also want to avoid excess expenses when revenue is the lowest.

The best way to smooth your seasonal cash flow is to diversity your business, so it can generate sales year-round. This could mean expanding into a different market where the peak season is at a different time of year or creating an online store to find customers in new geographic areas. The key to combating seasonal demand is developing a plan that ensures your business has a healthy cash flow year-round.

Effectively managing cash reserves can combat seasonality and generate a new revenue stream.

Probably the most common cash flow problem in business is poor management of cash reserves. This is because holding inadequate cash reserves can lead to insolvency, while holding too much cash can leave profits on the table.

Many effective managers will keep more cash than they need for their projected expenses in case of an emergency. This is a great strategy if reserve cash isn’t sitting idle in a bank account. By putting reserve cash to work, businesses with large cash reserves can significantly increase their bottom line. But historically, this process has been arduous.

In the past, managing large cash reserves meant maintaining relationships with multiple banks to access FDIC protection in excess of the $250k limit, while shopping multiple banks for the best rates. However, thanks to advanced financial technology [fintech] and our company, the days of shopping rates and maintaining multiple banking relationships are over.

Cash Flow Management Made Simple by ADM.

At the American Deposit Management Co., our team of cash consultants can work with your business to develop a plan that meets your cash management needs. Our strategies are designed to provide FDIC protection for all your cash while allowing access to the most competitive rates available. With an AMMA™ account by ADM, your cash remains liquid, and you keep your current bank.

Our goal is to provide your organization with the MOST safety and the MOST return for your business cash. When you work with ADM, our team of cash consultants will understand your needs and develop a strategy to optimize your cash. Our team is our secret sauce, and you will understand that once you give us a call.

Earn More, Risk Less®

At ADM, we take the work of cash management off your plate. If your business maintains a large reserve of cash, or if you are looking to reduce the work required to manage your cash, don’t hesitate to contact us. We look forward to the opportunity to provide your business with the MOST safety and the MOST competitive return available.

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