Cash is the lifeblood of a business. Not managing it well will lead to dire consequences.
According to one report, 82% of business failures are due to poor cash flow management.
In this article, we explore how to improve your cash flow plan by recognizing subtle patterns that can have a significant impact on your success.
Recognize Cash Flow Patterns
Businesses must regularly analyze their cash flow to identify trends that may be impacting their finances positively or negatively.
Businesses should perform a cash flow analysis every month when things are going well.
If you’re experiencing a crunch in your cash flow, conduct financial monitoring and analysis weekly, or even daily, instead of monthly.
Regular examinations of your company’s financial activity help uncover patterns of activity that you can act on to adjust your cash flow and either increase sales or pull back on spending.
Through vigilant monitoring, analysis, and predictions, you can create an “algorithm” for cash flow success built on the hundreds of variations you discover during the process.
To evaluate the amount of money you’re spending each month, group your expenses into categories. Take an objective look at each category and determine which ones are or aren’t creating an advantage to your cash flow.
3 Cash Flow Categories
Review the following 3 patterns to study and address your cash flow performance:
- Spending leaks
- Opportunities for improvement
- Opportunities for budget cuts
- Spending Leaks
Spending leaks waste cash on unnecessary purchases. For example, perhaps you’ve gotten behind on your vendor payments and are incurring late fees. What is the total monthly amount you’re wasting each month in late fees?
- Opportunities for Improvement
Opportunities for improvement may not be obvious, but can be distilled through close analysis.
For example, maybe your analysis shows that you have the bandwidth to pay for long-term needs earlier. You can try negotiating with your current vendors and suppliers to get a 1-2% discount on your payments by committing early. These savings add up over multiple accounts and can help boost your cash flow.
- Opportunities for Budget Cuts
If your business’ cash flow is in immediate need of repair, analyze your cash flow to identify areas where you can cut costs. Consider practical solutions that will quickly cut expenses without compromising the quality of your product.
These can include:
- Outsourcing some tasks to freelancers if it’s more cost effective
- Reducing overlooked “miscellaneous” spending, such as that for office supplies
- Thinking critically about the effectiveness of ingrained processes and revamping them if needed
- Identifying areas to consolidate spending, such as combining an employee training day and celebration into one event
- Reducing spending for exceptions to customer orders or services, focusing instead on what is needed for the vast majority of orders
Businesses should also plan for dips in their cash flow through financial forecasting. Solutions such as these are easier to implement when they are not a surprise. A growing number of companies are now using financial forecasting software to streamline their FP&A processes, making it even easier to plan ahead.
Adjust Accounts Receivables Practices
Spending is often where businesses first look to improve cash flow, but it’s not the only place. Adjusting your accounts receivable practices also provides an opportunity to improve your cash flow by allowing you to better collect payments on time.
According to a report by Atradius, over 90% of B2B businesses deal with late-paying customers.
If late payments are affecting your bottom line, there are many ways to improve the timeliness of collections, including:
- Sending out notices before invoices are due
- Closely monitoring your accounts receivables and following up immediately when an account is overdue
- Requiring deposits for high-risk transactions
- Offering an early-pay discount
- Altering your general credit terms
For example, review your collections history to learn if there are any common denominators among your chronic late-paying customers. Consider adding deposit requirements or other restrictions on accounts with high-risk indicators.
Many companies also offer a small discount (1-2%) to companies that pay for goods or services in advance, or to customers that pay 4-6 weeks in advance of the invoice due date. Early-paying customers can have a positive impact on your cash flow, but consider the effects the collective discounts might have on your total revenue before determining whether this is a positive step for your company.
Finally, there are other ways to increase the timeliness of collections with small changes to your A/R policies. For example, you can:
- Increase your deposit requirements by 1-2%.
- Reduce your payment terms by 1-2 days.
Boosting your on-time payments through adjustments to your collections policies helps improve your cash flow predictions and can provide a healthier cash balance at the end of each month.
Get More Results from Your Cash Flow Plan with Frequent Auditing and Adjusting
Look for small patterns across all your financial activity to uncover potential for improvements to your cash flow plan.
Riley Panko is a Senior Content Writer and Marketer at Clutch, a B2B research firm, and a Senior Writer at The Manifest, a B2B news and how-to site. She has conducted original research on accounting services.