Financials and Cash Flow

A CFO’s perspective: Cash flow trends and needs for seasoned businesses

Regularly monitor receivables, inventory, reinvestment, and payments for signs of changing cash flow.

Published: January 18, 2019

Business expansion, while creating new opportunities, can also lead to cash flow complexities: maybe because you’re managing payments from a wider range of customers, bringing on new employees, investing in new facilities, or purchasing new inventory. Any of these activities can affect cash flow — and if you’re not watching closely, cash can become tight.

The key to ensuring that cash flow remains optimized throughout these changes to business operations is a streamlined cash conversion cycle. The shorter the cycle, the less time capital is tied up in the business process.

Review these five items to begin improving your cash conversion cycle.

1. Accounts receivable

A cash flow review starts with examining business receivables, says Philip Campbell, CPA, a financial officer and consultant in Austin, Texas, and author of A Quick Start Guide to Financial Forecasting. Businesses can run into trouble in this area, he notes, when they’re so focused on increasing the raw number of sales that they are slow to invoice customers or follow up on collecting overdue payments.

If your receivables cycle is increasing, consider:

  • Accepting payments online. Give customers the ability to pay for services through your website. For regular orders and services, consider recurring billing to receive payments automatically.
  • Developing a customer credit approval process. Background checks will likely inform the amount of credit you can extend, the size of a purchase and the number of payments the purchase requires.
  • Prioritizing accurate customer data. An innocent mistake like an employee recording an incorrect customer address can mean the invoice goes to the wrong address and slows down receivables.
  • Automating billing. Reduce the number of hours needed to collect receivables, and make sure payments are connected to specific invoices rather than credited to the customer’s general account.

2. Outdated inventory

As a growing business continues to introduce product innovations, it’s easy to lose sight of the number of outdated products languishing in inventory. This trend can take different forms for each industry: For instance, retail stores may have obsolete items collecting dust on store shelves, service businesses may be ready with the necessary supplies for infrequently used packages, and manufacturers may have made changes to which materials their product uses — meaning any leftover, old materials are still taking up space in the warehouse.

While discarding or selling old inventory at a discount may temporarily hurt gross profit margins, Campbell explains that, in the long run, it’s more important to regain cash tied up in stale merchandise.

To improve your days inventory outstanding, consider:

  • Assessing which products are worth marking down to be quickly sold, and which should simply be eliminated. Many point-of-sale systems include inventory tracking capabilities so you can have better insight into what may sell with your customers.
  • Identifying appropriate inventory minimums and maximums based on historical needs and trends of your business.
  • Implementing a just-in-time production system in order to reduce the number of inventory obtained at one time.

3. Business reinvestment

In addition, cash flow issues can arise when business growth depends on an immediate investment. For instance, a business may need to hire new employees before it’s possible to bring in new paying customers, build a new plant or open a new office to expand geographically, or remodel stores to keep up with the competition.

With capital expenditures, “you’re spending money that doesn’t show up as an expense in the period,” yet cash flow still may be affected, Campbell explains. For example, a $50,000 monthly principal payment on a loan for a new facility will affect cash, even though that payment doesn’t appear on the company’s income statement.

Some business owners may be able to set aside cash in advance toward investments in people or physical spaces. If this isn’t possible, you may need to reexamine the timing of your planned expenditures, or obtain a line of credit or loan to keep up with payments.

4. Owner distributions

Another place to look for hidden cash flow problems is in owner distributions. Because these payments appear on the balance sheet, rather than the profit and loss statement, it’s not always apparent when distributions have gotten out of line with sales.

Noticing this trend can prompt difficult but necessary conversations, Campbell says. He explains that if the business’s profits are decreasing but owner distributions are remaining steady, it can often be necessary to reduce that outflow to preserve the long-term health of the business.

5. Accounts payable

Controlling cash outflow is just as important as expediting cash inflow. While the tendency may be to delay payables as long as possible, it can also be beneficial to make payments immediately, to demonstrate goodwill with suppliers and avoid funds being intentionally or unintentionally redirected.

To make sure your days payable outstanding works with broader company goals, you can:

  • Employ electronic payments wherever possible. This enables you to maintain control of your cash outflows, prevent fraud associated with paper payments, and facilitate transaction recordkeeping.
  • Issue purchase orders for each project. Lock in payment terms upfront and help streamline invoice tracking.
  • Perform due diligence with supplier contracts and data management. Seek to avoid complications that may interrupt payment schedules by mapping out specific expectations around product or service delivery, quality, and compliance. Also, prioritize updating master data if contracts are ever renegotiated, or supplier information changes.
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