Business disruptions and market downturns are likely to influence your short-term cash strategies, but they should not change cash flow best practices. Businesses should have the same overarching cash management rituals whether their company is thriving or struggling.
This article discusses three cash flow best practices that will serve business owners in any economic climate.
Cash Flow Best Practices: Have a Safety Net
We’ve heard for years how important it is for individuals to have a cash emergency fund, but is it realistic for businesses to do the same?
It may not be practical for your business to have three or six months of cash sitting in a bank account, but business owners should have a plan if they need cash in a pinch. Holding illiquid assets like excess equipment, real property, or private company stock may be standard in your industry, but it is unwise to do so at the expense of having sufficient access to cash when you need it. Finding the right balance might be tough, but it’s something you can refine over time. Best practice is to have some cash that you can access immediately, cash equivalents that you can liquidate quickly, and less liquid assets that you can sell or dissolve if your cash needs extend beyond just a couple months.
Even businesses with a healthy cash safety net would be wise to have access to a business line of credit. If you’ve been a reliable payer in the past, your bank may be willing to extend your line of credit (or grant you a new one) that you can use as a last resort.
Cash Flow Best Practices: Use a Dynamic Cash Flow Model
Cash flow modeling does not need to be anything fancy. If your finances are simple enough, it doesn’t even need to exist outside of your income statement. The goal of modeling cash flows is to become familiar with how cash moves throughout your company. This means you will need to accurately track revenues, expenses, debt payments, investments, asset purchases, and taxes.
A cash flow model is a system you use to monitor your cash needs over a certain period. With this system, you should be able to project your cash needs out a month, a quarter, a year, or even multiple years. A dynamic cash flow model is one that allows you to make changes to individual variables and see the results in real time. With a dynamic model, you can run “what if” scenarios so you understand the range of cash positions that are possible.
To effectively utilize your cash flow model, you will need to start with good numbers, so get your accounting records in order before you attempt to forecast your cash needs. You will also need:
- Reliable estimates
- Regular check-ins with management and stakeholders about expectations
- Clearly defined cash targets
- Regular discussions with treasury and bookkeeping functions to understand cash availability
- Open lines of communication so that supervisors and employees can report concerns about their ability to generate cash
- A good balance of optimism and pragmatism
Cash Flow Best Practices: Expedite Cash When Possible
Expedite your cash receipts by first going after the low-hanging fruit. Simply changing how you manage unpaid invoices will make a big difference in your cash conversion cycle. To encourage customers to pay you faster, you can:
Invoice promptly.
Don’t wait until the end of the month to invoice if you can avoid it. Invoice immediately once the project is done as part of your project sign-off process.
Automate invoicing.
If your bookkeeping system is advanced enough, it can generate invoices after a certain trigger in the system, allowing your staff to simply approve the invoice and move onto the next one.
Revamp invoicing procedures.
If you cannot automate invoicing, tighten up your billing process. Consider invoicing twice per month rather than only once, or shorten the time between when invoices are generated and when they are approved.
Update payment policies.
Change how quickly you receive payment by changing your payment policies. If you allow payment within 45 days, consider changing to a net-30 policy to get your cash that much sooner.
Encourage early payments and discourage late payments.
To incentivize your customers to pay you timely, offer discounts for early payments. Similarly, discourage late payments by applying nominal interest or fees to the balance when customers miss payment deadlines.
Accept multiple forms of payment.
When you offer multiple payment options, your customers can choose the option that’s best for them. Some may have long check drafting processes and would rather pay electronically, while others feel more comfortable quickly writing a check and dropping it in the mail. Make it easy for your customers, and you’ll get paid even sooner.
Cash is a vital resource for businesses, and it’s imperative we handle it carefully and with conservativism. To read more in our cash flow series, see the links below, and reach out to our Landmark advisors if you would like to discuss cash flow best practices or other cash flow needs with one of our experts.
Want to read more about cash flow? Check out the posts in our cash flow series below.
Sailing the Seas of Business on a Healthy Cash Flow
Why Business Owners Need to Care About Cash Flow
How Cash Flow Forecasts can Help Your Business