The Importance of Business Cash Flow Management

Coins with a line chart and bar chart – meant to indicate the uncertainty in business cash flow management

Cash management is one of the most important aspects of operating a business and can dictate success in any industry. Poor cash management or a lack of free cash flow can lead to excess debt and even bankruptcy. The string of recent corporate bankruptcies, brought on by the COVID-19 pandemic, have evidenced the need for businesses to maintain sufficient cash reserves. On the other hand, being too conservative and stockpiling cash reduces the efficiency of that cash and can take away from potential investment and growth.

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 is 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. But 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 iceburg. 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. As a smaller organization, 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 getting started immediately is critical.

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 possible 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 you can, while still avoiding penalties. At the same time, make sure to have a working relationship with vendors and maintain a good credit rating to allow for negotiating the best payment terms with those vendors.

Another large source of outflows is capital expenditures, and cutting those costs can make a major impact on your cash flow. For example, repairing equipment when possible and buying used equipment can ease outflow pressure. Once again, delaying upgrades or replacements until they are completely necessary keeps cash in hand for longer and stretches your cash further. Financing large orders, especially in this ultra-low interest rate environment, can also keep more cash on-hand for longer. In addition, smart businesses will also 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, businesses can ensure payments aren’t delayed, especially with costly or time-consuming projects. And with the pandemic increasing uncertainty across the economy, escrow services are quickly becoming a must to protect businesses who conduct live events or organize other large gatherings that might be cancelled without notice.

Keep Business Cash Safe and Working with an American Money Market Account™ [AMMA™] 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 the AMMA™ account as an enhancement to your current bank account. AMMA™ accounts feature next-day liquidity and boast extended FDIC coverage with the most competitive return available for your cash. And if your 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 an AMMA™ account, ADM provides a full suite of cash management solutions for your business. If your organization is about to undertake a large project, call us. We offer a variety of services that range from fintech powered Business Escrow to Vendor Payment Processing. Our robust cash management services can help you reduce the risk and workload required to manage your business and your next project.

Earn More, Risk Less® with Cash Management Services by ADM

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.

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.

If you’re looking for even more valuable insights on banking, interest rates, and effectively managing your business cash, be sure to check out our Insights page and follow us on LinkedInTwitter and Facebook.