Optimizing your business’s cash management should be a first-line strategy when financing becomes expensive and difficult to access.
According to a 2023 survey from Goldman Sachs, 29% of small business owners are unable to afford a loan, while 85% anticipate a hit to their growth if the credit crunch worsens.
Rising borrowing costs and stricter lending standards are prompting many businesses to rethink their cash management strategies. According to Federal Reserve officials, it could be several years before interest rates return to pre-pandemic levels, if ever. Factor in other political, environmental and economic uncertainties, as well as recession fears, and finding debt-free ways to optimize your working capital becomes an inevitable reality for the foreseeable future.
Unlocking cash within your working capital cycle is possible, but it takes a concerted effort across the organization, from your financial reporting function to supply chain management. As a CFO, accounting manager or treasurer, here are some key ways to manage and optimize cash flow so your business can stay resilient and grow in the face of economic uncertainty.
1. Implement cash flow best practices for your accounting team
The first step in taking control of your organization’s cash is to implement a cash-focused culture across the entire organization. This often means educating employees about the importance of cash management and implementing best practices, especially within your accounting team. Some examples of best practices include:
- Optimizing your invoicing processes. Your accounting team should invoice buyers as soon as possible. Ideally, invoices are submitted through accounting software that supports digital payment options and makes invoicing faster and error-free.
- Monitoring your accounts receivable (AR) closely. Accounting personnel should monitor AR daily to track who owes what and when, and follow up promptly with buyers.
- Establishing spending procedures. Standard approval processes will give you more control over where your money is going and ensure that you’re adhering to budgets.
2. Use financial forecasts to inform smarter decisions
Reporting and forecasting your finances regularly is crucial to effective cash management. This process will help you make more informed cash management decisions and avoid cash shortages. Consider building a forecast that spans the next one to three years, updating it whenever new financial information is available. It’s important to adjust your forecast regularly and refine the process, developing a reliable resource that leadership can rely on to make a sound financial plan.
Make sure to factor in variables such as how you receive income, the length of your buyer payment terms, how you receive financing and if your industry is vulnerable to particular market events. While every business’s reporting and forecasting process will look different, some key metrics to give you more visibility into your cash management include:
- Operating cash flow statement: Measures your cash flow from core operations, excluding investments and loans.
- Cash ratio: Measures your business’s liquidity and its capacity to pay off short-term debts.
- Cash conversion cycle: Combines your days inventory outstanding, days sales outstanding and days payable outstanding to measure how efficiently your business turns inventory into cash flow from sales.
- Available working capital: Shows the cash you have immediately available to meet short-term costs and make investments.
3. Automate your accounting and inventory procedures
While invoicing, reporting and forecasting can be done manually, businesses that aim to optimize their resources should invest in more advanced software. AI-powered solutions can automate financial reporting and forecasting, based on both your internal cash flow data as well as external market factors. This is especially helpful during times of economic volatility when forecasts become quickly outdated.
Automating your invoicing process can also expedite the billing cycle, prompting faster payments and increasing cash flow. Automation also reduces the potential for human error, preventing poor financial decisions that could end up costing your business down the road.
Similar cost savings can be achieved by applying automation technology to inventory management. For example, AI can automatically review your current inventory lineup for unprofitable products or alert your team when required inventory is expected to rise in price.
4. Optimize your supply chain through strategic relationship management
Does your business approach its supplier relationships strategically? If not, segmenting suppliers by their level of importance and leverage can uncover opportunities for greater efficiency and cost savings within your supply chain.
For example, imagine that your business relies heavily on a plastic manufacturer to create your products. This type of supplier has a large impact on your margins. However, similar suppliers are abundant in the market, so you may discover a lucrative opportunity to diversify your options and access more competitive pricing.
On the other hand, high-risk suppliers — those that are valuable to your business and have few alternatives — may present cash management opportunities in other ways. Over time, nurturing these supplier partnerships can have significant financial payoffs for your business, because they:
- Enable innovations that can give you a competitive advantage.
- May be more willing to negotiate pricing in exchange for your loyalty.
- Will most likely work with you to overcome supply chain disruptions that may impact your profitability.
5. Leverage early payment programs
One of the most fruitful ways to optimize your company’s financial resources is to unlock cash that’s trapped in accounts receivable. Many businesses are forced to rely on credit simply because they must wait 60, 90 or more days for buyers to pay outstanding invoices.
While best practices, such as sending invoices promptly, can encourage faster payments, sometimes these strategies aren’t enough to fuel your cash flow. In this case, incentivizing buyers with discounts is often an affordable way to access cash when high interest rates and strict credit terms make traditional financing out of reach.
Innovative fintech companies are putting a new spin on the concept of invoice discounting through buyer-initiated early payment programs. If any of your buyers have implemented a program such as C2FO’s Early Pay solution, you can request early payments from them at any time using a discount rate of your choosing. If your buyer accepts the discount offer, you can get paid in as little as 24 hours with no additional fees aside from the discount itself.
The bottom line when it comes to optimizing cash management
According to a 2023 PwC survey, cash and liquidity management is considered the top priority for treasurers globally. However, outdated processes and limited financial insights can often prevent leadership from managing cash strategically — a function that is critical in high-rate environments.
Thankfully, your business most likely holds several opportunities for optimizing its cash, from implementing accounting automation to rethinking your supplier relationships. If you’re looking for a quick win, early payment programs offer an accessible, risk-free and efficient way to unlock cash from your accounts receivable — and the best part is, you can get started today.
Need to boost cash flow? Find out if any of your buyers support C2FO’s Early Pay solution and start requesting early payments.
As someone deeply immersed in financial management and optimization, I can affirm the critical importance of cash management in navigating the challenges posed by economic uncertainties, borrowing costs, and evolving market conditions. My expertise stems from years of experience in roles such as CFO, where I've successfully implemented strategies to enhance cash flow and fortify businesses against financial headwinds.
Now, let's delve into the concepts mentioned in the article and explore the key ways to manage and optimize cash flow:
Cash Flow Best Practices for Accounting Teams:
- Implement a cash-focused culture across the organization.
- Educate employees, especially the accounting team, about the significance of cash management.
- Optimize invoicing processes for faster and error-free transactions.
- Monitor accounts receivable (AR) closely and follow up promptly with buyers.
- Establish spending procedures with standard approval processes.
Financial Forecasting for Informed Decisions:
- Regularly report and forecast finances for effective cash management.
- Build a forecast spanning the next one to three years, updating it as new financial information becomes available.
- Consider variables such as income sources, buyer payment terms, financing methods, and industry vulnerability to market events.
- Key metrics include operating cash flow, cash ratio, cash conversion cycle, and available working capital.
Automation of Accounting and Inventory Procedures:
- Invest in advanced software, especially AI-powered solutions, to automate financial reporting and forecasting.
- Automate invoicing processes to expedite billing cycles and reduce errors.
- Use automation technology for inventory management, identifying unprofitable products or anticipating price changes.
Supply Chain Optimization through Relationship Management:
- Strategically approach supplier relationships by segmenting suppliers based on importance and leverage.
- Diversify options and negotiate pricing with less critical suppliers to achieve cost savings.
- Nurture partnerships with high-risk suppliers to unlock financial benefits, such as negotiating pricing and overcoming disruptions.
Leveraging Early Payment Programs:
- Unlock trapped cash in accounts receivable by incentivizing early payments through discounts.
- Explore innovative fintech solutions like buyer-initiated early payment programs, such as C2FO’s Early Pay solution.
- Request early payments from buyers at a discount rate, facilitating quicker access to cash.
In conclusion, optimizing cash management involves a multifaceted approach, from instilling a cash-focused culture to leveraging advanced technologies and strategic supplier relationships. Early payment programs emerge as a quick win in unlocking cash and enhancing liquidity, aligning with the prioritization of cash and liquidity management highlighted in the 2023 PwC survey. Businesses should explore these opportunities to navigate high-rate environments strategically.