Prepare in advance for whatever the market might bring your way.
At the beginning of 2023, there was one thing most economists seemed to agree on: The U.S. economy would likely veer toward a recession before the year was over. Fast forward nine months, and the view of economists had changed substantially. The changing opinion of professionals whose job it is to understand economic conditions and trends highlights the fact that the trajectory of the U.S. economy is highly uncertain—there still could be a recession, but there also might be a so-called soft landing that avoids a downturn.
For business owners and company chief financial officers, the economic uncertainty reinforces the critical importance of maximizing cash flow. “Optimizing cash flow absolutely must be at the top of the mind of CFOs and owners,” says Dan Eveloff, Treasury Management Executive at Regions Bank. “Maximizing access to company capital is how a business should seek to isolate themselves from being susceptible to market fluctuations.”
Here are five steps CFOs and business owners can take to maximize their cash flow in these uncertain economic times.
1. Understand the Tools Available to Manage Cash Flow
At the most basic level, cash flow represents the flow of money into and out of a company. Keeping that basic concept in mind can help pinpoint the levers available to ensure that a business has ample resources to pay employees and fund operations.
“When you look at the ability of a business to maximize capital, it’s really about maximizing payables and receivables so that you have the highest level of working cash in the business at all times,” Eveloff says. This means that companies should pay special attention to accounts payable days, accounts receivable days and inventory.
2. Benchmark Against Your Industry
Once a business owner or CFO knows the basic tools for maximizing cash flow, it is possible to explore potential steps to take. For instance, extending payable terms can help a company retain more capital. And it may be the case that your company is unwittingly agreeing to overly generous payment terms that can be negotiated.
Take the time to benchmark how others in your industry handle payment terms to see if changes can help maximize cash flow. “Data exists, for example, that can give perspective on what somebody in, say, the masonry contracting industry might expect around days payable or receivables that can help you maximize capital,” Eveloff says.
3. Expand Your Payment Options
Sometimes maximizing cash flow requires talking with your vendors, suppliers and customers to identify opportunities for your company to hold on to more cash in ways that don’t harm important relationships. “If there’s an opportunity to lean into payment terms where there is not a negative impact on the business, then you clearly want to do that and slow down the outgoing payment,” Eveloff says.
Once you have those discussions, it can also be helpful to take a closer look at how you make payments because various options differ in how long they take to transfer capital. “There are diverse payment modalities, from paper disbursement to ACH [automated clearing house] to real-time payments,” Eveloff says. “A paper check will take longer than ACH or real time, and having a combination of these options gives you tools to manage cash flow and business relationships at the same time.”
4. Analyze Your Inventory
When Eveloff and his colleagues at Regions Bank collaborate with a business to assist with managing their cash flow, they begin by developing what’s called a working capital map. This provides information about average account days payable and receivable and inventory turnover time. For companies that sell physical goods, a clear understanding of inventory turnover can make a big impact in maximizing cash flow. Having too much inventory, for example, can often mean significant warehousing expenses and the risk that products will be damaged or stolen. Companies want to have enough inventory to meet demand but not so much that they are adding unnecessary costs and risks.
“We will look at inventory and other data points and find out what the daily impact on cash is,” Eveloff says. “That helps us come up with a customized approach to manage inventory to improve cash flow.”
5. Use Cash Flow Analysis as an Opportunity to Improve Your Business
The analysis required to maximize cash flow inevitably surfaces insights that can improve how a company operates and makes investments. This means that taking the steps needed to maximize cash flow has short- and long-term benefits.
“As you start to take advantage of solutions to maximize cash flow, you have a reduced need for credit. That means you can make capital expenditures without borrowing and paying interest,” Eveloff says. “And it can have a big impact on operations. When you talk about weathering an economic downturn, those are the things that are going to help you weather the storm.”
Three Things to Do
- Read more about mastering cash flow needs with liquidity risks.
- Learn more about how technology can play a role in your cash flow processes.
- Consider how a business line of credit may help to alleviate your cash flow concerns if you have a short-term need.
