Cash flow is formally defined as the (real or virtual) movement of money, but in business, the term is mostly used to show inbound or outbound payments expected into the future. This is why the concept of cash flow is interrelated with value, interest rates and liquidity. In any economic climate, a CFO should take care to find ways to ensure that a business prospers through the smart use of cash flows. Effective cash flow management can confidently direct cash, wealth and capital and drive the company towards more profitability in the long run. Corporates and SMEs alike, need solid cash flow management strategies as part of their growth strategy.
Effective Cash Flow Management reduces stress, helps the organization plan ahead, and indicates to lenders and other stakeholders that the company has control over its business cycles. However, as seen repeatedly, and especially in times of higher costs or inflationary pressures, most businesses run into trouble because cash flow is not well controlled. Both CFOs and CEOs must be on top of cash flow management otherwise they run the risk of bankruptcy. Case in point, about 80% of business failures are triggered by poor cash management, according to Bank related studies. Evidently cash flow is a serious matter, but is it easy for a business to maintain a positive cash flow?
Though it might sound straightforward enough, having a positive cash flow incorporates much more than company profitability. This is because, even if a company is currently profitable, it is still and always, at risk for negative cash flow. A common example of this scenario is when a company has future payment obligations that simply cannot be met because it miscalculated inbound cash or timing. By maximizing a company’s cash flow, CFOs can help a company receive profits faster, meet targets in a shorter time frame, and even lower its operating expenses. So, whether you are interested in refining or saving your business, the following practises may prove a life vest:
- Payment terms: negotiate terms with clients to make the payment deadline as early as possible or ask for a partial upfront deposit.
- Incentives/Penalties: discount the value of the invoice if the payment is made within given days and/or add late payment fees.
- Accounts Payable: contact company vendors and coerce them for longer payment terms in exchange for good business practices and growth.
- Cautious Forecasts: maintain a positive cash flow by allocating funds for growth while being ready to cope with unexpected events.
- Manage Expenses: dedicate time to business expense management and finding the source of unnecessary spending to eliminate wasteful cash leaks.
- Stock Control: review stock levels consistently and accurately according to turnover in order to convert slow inventory to cash.
- Smart Finance: explore any type of liquidity facilities that can be used to accommodate any future cash flow shortfalls based on the cash flow projections.
So, successful cash flow management provides a safe space for businesses to operate without the risk of running short of money. But it is an equally important element of any CFO in order to support a successful growth strategy. These two principles together, are what really drives forward great businesses that can thrive and grow sustainably. Therefore, a smart business leader needs to balance the proactive approach to cash flows whilst constantly finding ways to optimizing its current market value proposition – either through efficiencies, added value or specialised expertise.