When the stock market took a precipitous plunge this past December, there was immediate chatter on the possibility of sliding into another recession. It occurred to me that not only have we gone nearly ten years without a recession, but that there are people in management positions now that have never experienced a significant downturn, yet they are responsible for managing their organizations through the morass.

While the recovery of 2018 was quick, the menace of another recession hitting is only a matter of time. And whether you’ve survived a recession or are anticipating a future slump, you’ll find that the same thing that supported your survival also helps you thrive during the good times. It’s all about preservation of cash.

Money in, money out. That’s what gives life to any business. But effectively managing your cash inflows and outflows doesn’t happen easily, it requires consistent, intentional effort and conscious planning. Below are several considerations on creating and maintaining strong cash flow.

The Sales Cycle

The success and vitality of a company depend on two cycles. From an operational point of view, the first is the sales cycle — that is, how long it takes your business to:

  1. develop, purchase or otherwise acquire a product or service,
  2. market that product or service,
  3. close the sale, and
  4. collect cash.

Collections, from clear, accurate invoicing to using bank lockboxes for faster access to money, is a major aspect of cash flow management. It isn’t enough to watch your accounts receivable agings, you need to manage your agings by maintaining close contact with your customers. Don’t wait to call customers when their balance hits 60 days – if they don’t pay you within customary arrangements, reach out to them and check in. Remember, some companies use their vendor payables like a noninterest-bearing line of credit. If you are willing to let them stretch out to 90 days or more, then that is less money that they can borrow from their bank (and perhaps, more money you borrow from your bank).

Many companies either underestimate the impact of the selling cycle or lose sight of its gradual expansion. Underestimating often affects start-ups, as entrepreneurs sometimes believe they can get their wares to market, close deals and collect on them more quickly than reality allows.

The latter quandary, losing sight of the elongation of the sales cycle, can affect even well-established companies. Regular customers may start taking longer to pay or a major buyer might jump ship which is sometimes harder to replace than expected.

The Disbursements Cycle

The second cycle is the disbursements cycle. This is the process of managing the regular, outgoing payments to employees, vendors, creditors (including short- and long-term financing) and other parties. As payments go out, your cash flow is affected.

The selling and disbursements cycles aren’t separate functions; they overlap. If they don’t do so evenly, your delayed cash flow can create a crisis. That’s why it’s critical for business owners to understand the interaction between the money being spent to generate revenue and the revenue being generated.  One way is to track your “cash flow gap” – that is, the number of days in payables as compared to the number of days in receivables – the closer these ratios, the better, and hopefully with the days in payables slightly higher.

As you work to match revenue to expenses, you also should ensure that your selling cycle (cash inflows, including outside financing) matches your disbursements cycle (cash outflows). Ideally, you’re converting sales to cash more quickly than you’re paying expenditures, thereby strengthening cash flow.

As mentioned earlier, opportunities may exist to stretch your vendors out and enhance your cash flow, but there needs to be a balance – don’t just stretch your vendors, be sure to communicate with them as well. Failure to communicate could damage your relationship with vendors and possibly obstruct the credit you need from them in the future. When circumstances warrant a “pay-when-paid” arrangement on longer-term contracts, talk with your vendors about the situation and see if they would be willing to participate.

Account for Everything

As your selling and disbursement cycles roll along, your company generates data. Failing to process this information completely and accurately could lead to cash flow confusion or worse -you could find yourself running thin on cash resources and not able to effectively manage your business.

Report generators are also critical for managing cash flow accurately. Your system should allow you to readily generate accounting reports — daily, weekly, monthly and annually. This means being able to easily record and access recurring transactions as well as accounts payable aging and payment schedule.

Today’s accounting systems also can provide you with a “dashboard” of real-time information, so you’re less likely to be caught off guard by cash flow influencers. Daily flash reports can be created for management to see the day-to-day key drivers of cash flow in the business and can react quickly. In addition, budgeting tools can help you set and monitor budgets, perform “what if” analyses and compare actual results to goals.

If you’re not leveraging the power of today’s financial software, you’re leaving yourself vulnerable to the whims of fortune.

Use your Financial Statement

The data gathered and generated by your accounting system eventually ends up in your financial statements. Yours should factor in the cash inflows and outflows of daily business operations, asset purchases, sales proceeds and financing activities. Because it excludes noncash accounting items, you can use it to pinpoint cash flow problems.

And once you have accurate financial statements, be sure to use the information they provide to help make any necessary adjustments as you move forward.

Strong and Steady

Changes in commercial trends, dips in the economy, and problematic customers all threaten to slow the stream of cash and compromise your business. If you haven’t worked through a recession, you haven’t had the chance to learn best practices that will help you endure those tough times, nor have you had the chance to apply those practices in good times. But diligent management and accounting techniques can help cash flow at your company remain steady and strong.

About the Authors

Eric D. German

CPA, MAcc
Partner, Assurance and Advisory

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