Cash management is one of the most important aspects of operating a business and can dictate success in any industry. Conversely, poor cash management or a lack of free cash flow can lead to excess debt and even bankruptcy.
The string of corporate bankruptcies early in the COVID-19 pandemic, before government support became available, evidenced the need for businesses to maintain sufficient cash reserves. Businesses that didn’t have sufficient cash to maintain operations during the pandemic were left with few options. On the other hand, those companies with an effective cash flow management strategy were able to weather the disruption.
Poor Cash Flow Management Plagues Businesses Big and Small
Cash flow management is not so much about revenue and expenses, as it is about the movement of cash throughout a business. There are many ways that cash management can go wrong, and even the largest organizations are not immune.
As an example, Greece ran into serious trouble when it didn’t have enough cash flow to cover its outstanding loan obligations. Greece’s debt-to-GDP ratio was not unlike many other developed nations, but when cash flows dwindled during the financial crisis, it needed external help to save itself.
While not a typical business, Greece is just one example of how even the largest of budgets are not immune to cash management issues during a downturn. For smaller organizations, this risk is often much greater.
Small business cash management can be challenging.
A strict focus on profits can sometimes take away from the importance of being cash flow positive, especially for small or growing businesses. In many cases, small businesses do not fail because they stop making profits, they fail because they run out of cash.
Analyzing cash flows on a monthly or even weekly basis is important to stay on top of changing cash trends. But that is just the tip of the iceberg. Effective cash flow management means an organization must determine the optimal level of cash reserves to keep on-hand, so they can always meet their obligations. For smaller organizations, the challenge of maintaining enough cash to operate effectively can be even greater – mainly because smaller revenue streams leave less room for error.
Tips for Effective Cash Management
There are a few things that every business manager can do to improve their cash management process. Some of these tasks are simple and others can require some planning, so it’s critical to get started immediately.
Create Forecasts that Account for Unexpected Situations
To be effective at cash management, businesses must create forecasts with a series of what-ifs, such as a large client moving elsewhere or an unexpected expense. For companies who have a shorter client list, this type of planning is even more critical to long-term sustainability.
By analyzing as many potential scenarios as possible, businesses can identify and spotlight the areas of highest risk to operations. Then managers will have the information they need to plan accordingly. After all, planning and awareness are what cash flow management is all about.
Delay Cash Outflows When Possible
There are two major aspects to cash flow management: inflows and outflows. When managing outflows, it is important to cut expenses when possible and put off spending money for as long as is feasible, while still avoiding penalties. At the same time, make sure to have a positive working relationship with vendors and maintain a good credit rating to allow for negotiating the best payment terms.
Another large source of outflows is capital expenditures and cutting those costs can make a major impact on cash flow. For example, repairing equipment or buying less expensive used equipment can ease outflow pressure. Further, delaying upgrades or replacements until they are necessary keeps cash in hand longer and stretches cash further.
When purchases are unavoidable, financing large orders can stretch cash flow. In addition, smart businesses will slim down inventories as much as possible without interfering with business needs.
Keep Inflows Timely and Predictable
For optimal cash management, inflows should be collected as soon as possible. Offering discounts to customers for paying faster, even as little as 2%, can provide just enough of an incentive for clients to pay their bills sooner. Business managers should also follow up quickly on late payments and reassess business deals that aren’t performing. Selling or leasing idle equipment or property can also free up excess cash.
For additional cash flow security, many organizations are leveraging escrow services. By utilizing business escrow, firms can ensure payments aren’t delayed, especially with costly or time-consuming projects.
Keep Business Cash Safe and Working with Marketplace Banking™ by ADM
Proper investment of short-term cash can provide extra income without sacrificing safety or liquidity. Our company, the American Deposit Management Co. [ADM], offers Marketplace Banking™ as an enhancement to your current financial relationships.
With Marketplace Banking™, businesses can receive next-day liquidity and access to extended FDIC / NCUA coverage with nationally competitive returns. If expenses are predictable and regularly scheduled, ADM can develop a CD laddering strategy that can increase returns even further, without sacrificing safety.
In addition to the protection and return provided by Marketplace Banking™, ADM provides a full suite of cash management solutions that can help reduce the risk and workload required to manage a business and its projects.
Earn More, Risk Less® with Cash Management Services by ADM
Our goal is to provide organizations with access to unparalleled safety and nationally competitive returns. When businesses work with ADM, our team of deposit consultants will understand their needs and develop a strategy to optimize their cash management plan. Our team is our secret sauce, and you will understand that once you give us a call. For even more valuable insights on banking, interest rates, and effectively managing business cash, be sure to check out our Insights page and follow us on LinkedIn, Twitter and Facebook.