There’s a reason why cash flow has been called the “lifeblood” of a successful business. Companies can operate without profits for a period of time — just look at Amazon, which was unprofitable for years while it built market share in the emerging e-commerce space.
But it takes cash to pay operating expenses and overhead. Businesses can only keep going for so long without cash, which is why boosting cash flow should be a top priority for financial executives and CFOs. In fact, poor cash flow is one of the main causes of business failures.
Here are 7 strategies for strengthening your company’s cash flow.
1. Tighten your cash flow cycle. The goal here is to shorten the time between cash outflows used to pay expenses and cash inflows from collected receivables. To accelerate collections, pay close attention to your accounts receivable aging report. This will help you prioritize your collection efforts by showing which clients’ payments are past due, how late the payments are and how much money each overdue client owes. You can also negotiate payment terms with customers and offer discounts for prompt payments, such as 2-10, net-30.
On the flip side, try to stretch out payments to suppliers as far as possible. Talk to vendors about extended payment terms and take full advantage of the terms offered by setting up your accounts payable system so that payments are made on the due date, not before.
2. Cut costs and overhead. It’s always smart to operate as “lean and mean” as you can, but this is especially important in today’s inflationary environment. Money saved through diligent expense management frees up cash and drops straight to your bottom line.
Scrutinize your expenses looking for waste at all levels of the business. One way to do this is to ask if an expense is generating return on investment or not. If it isn’t — underperforming sales and marketing efforts, for example — cut it now.
3. Improve inventory management. Excess inventory represents a big expense for many companies — it’s literally cash sitting on the shelf. Examine your inventory and purge slow-moving items by discounting them deeply, if necessary. When it comes to raw materials, use just-in-time (JIT) inventory management techniques so they are delivered to your warehouse just when you need them, not weeks early.
4. Consider equipment leasing. Leasing instead of buying equipment frees up cash you might otherwise spend on big-ticket items that you can use to meet current expenses instead. Equipment leasing also provides protection against equipment obsolescence and may offer tax benefits in certain situations. Be sure to speak with your tax advisor about these potential tax breaks.
5. Partner with your bank. Banks offer a wide range of solutions that can strengthen cash flow, including lockbox and remote deposit capture (RDC). These solutions accelerate funds availability by getting checks deposited into your account faster. With lockbox, customers’ payments are mailed directly to a bank post office box for immediate processing. With RDC, checks can be deposited directly from your office using a special scanner and software.
Also talk to your bank about investment sweep accounts that automatically sweep excess cash in your business checking account into an interest-bearing account, like a money market fund or government obligation fund. Conversely, a loan sweep account will automatically sweep funds from operating accounts to pay down your business line of credit or other business loans.
6. Roll out new product and service lines. You can potentially boost revenue and cash flow by introducing new products and services that your customers might be interested in purchasing, especially ones that complement existing products and services. Similarly, you could potentially expand marketing of your existing products and services to new geographic areas and/or customer segments.
7. Consider outsourcing your finance function. Nearly half of all businesses now outsource their finance and accounting to a third-party specialist.1 Doing so by using Finance as a Service (FaaS) can help control costs, increase efficiency and boost cash flow. In fact, studies have shown that using FaaS can lower the cost of the finance function by between 30% and 40% compared to the fully loaded costs associated with staffing an internal finance department.
FaaS goes beyond simply outsourced accounting by offering a comprehensive approach to financial and accounting management, along with greater transparency and rigor. It provides a full suite of staff, services and software that’s capable of managing your entire finance and accounting operation. With FaaS, you can quickly scale up or down the finance function as needs arise or subside.
Contact Consero Global to learn more about how using Finance as a Service could help strengthen your company’s cash flow.