Are You Prepared to Manage Cash Flow Next Year?

Written in conjunction with our partners at CFO Selections

​A cash flow shortage is the number one reason why small businesses fail, but even mid-sized and large companies need smart cash flow management to survive and thrive.
Insufficient cash forces companies to make difficult decisions about who is going to get paid and when. Unfortunately, this can lead to vendors and suppliers being paid late, being overdue on rent, even employees waiting on paychecks.

It is not an exaggeration to say that cash is the lifeblood of any business. Not having enough money to pay for expenses can erode business credibility, which leads to:

• Suppliers refusing to do business
• Credit card companies increasing interest rates
• Vendors tightening payment terms
• Landlords evicting tenants
• Employees leaving

Ultimately, a company’s potential will be stifled if there is not enough capital to invest in the assets that facilitate growth, and its very existence can be threatened as well.
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So, are you ready to manage cash flow for the coming year? 

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​Planning and Forecasting
Effective cash flow management hinges on predicting when cash in-flows will slump to hold onto enough cash during surges to fill in the gaps.

Reliable FP&A (financial planning and analysis) definitely requires the expertise of seasoned financial professionals and the overarching financial direction provided by a Chief Financial Officer (CFO). However, while those senior and executive-level roles are responsible for data analysis and long-term strategic planning, their decisions will be informed by the ongoing financial reporting provided by your accounting team. For this reason, it is crucial to have a trusted accounting team that is adept at utilizing accounting software to provide the kind of ongoing reporting and ad hoc reporting that the organization needs to manage their cash position. Forecasts can be established from these reports and budgets can be set to better control spending. 

Reducing Spending
Your accounting team can also advise on where spending can be reduced shrewdly to free up cash for critical operating expenses. Understanding where spending has exceeded (or is on pace to exceed) budgeted amounts is a surefire way to identify areas that need to be looked at more critically.

The goal is to improve profit margins without stifling future business growth, which is why the experts at CFO Selections remind us to,

“Work on both sides of the equation to both reduce costs and increase perceived value. When cutting costs, be sure not to hamper revenue by reducing product quality or deliverability. Instead, improve production efficiency, eliminate waste, reduce transportation costs, and prioritize environmental sustainability to improve your bottom line.”

Again, taking the data and making decisions about where to make cuts is the realm of the CFO, but your accounting team can play a part in providing the information required to make these kinds of determinations. As our team explains, during a market downturn an accountant can play an even more critical role in controlling spending because,

“Accountants are uniquely positioned to identify unnecessary expenses. Their objectivity makes them a strategic ally, especially in lean financial times. In areas where costs cannot be avoided altogether, your accountant can also advise on when and how to defer expenses to maintain healthy cash flow when sales and profitability are down. Accountants can provide an accurate picture of which vendors need to be paid. They can also suggest which vendors should be paid more slowly (or quickly).”

An accountant can also help identify trends where spending has grown over time to inform future budgeting efforts because when these types of expense increases can be anticipated, they can be better managed.

Sustaining Cash In-Flows
Anticipate cash flow valleys by understanding whether your business has any seasonality that will affect revenue. Look at revenue numbers and sales figures by month and compare them to historical data from previous years. For businesses that are more seasonal in nature, developing additional revenue streams to sustain the business during those valleys is one strategy for smoothing out cash in-flows. Your accountant can provide information on which product lines and individual products are the most profitable to help your key decision-makers formulate a revenue strategy.

Remember, regardless of how balanced your revenue numbers are, the best way to stay on top of cash coming into your business is to tightly manage invoicing. Send invoices promptly and have formal policies in place to govern payment terms including early payment discounts, late payment penalties, and collections protocols. Communicate these policies to customers at the time of invoicing and reiterate them to customers that have a history of late payment.

Financing
When your business needs to bring in more money quickly, you may need to lean on outside financing in the form of a bank loan or line of credit. Our partners at CFO Selections explain the role financing plays in cash flow management when they say, “Working capital provides the resources needed to continue, and even expand, daily operations. Bringing in additional capital improves cash flow, making it easier to manage the lifeblood of the business and facilitate long-term strategic planning.”

An accountant can advise on how much cash the business has currently and how much cash is needed to sustain operations over a set period of time so that your controller or CFO can explore possible financing options. If you do not want to seek financing, shortening your Cash Conversion Cycle can help improve cash flow without the need for external funding.
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An accountant’s expertise is instrumental in managing your cash flow. If you need help finding accounting services that fit your company’s needs or hiring a senior accountant full-time, please contact us! ​