We often hear “cash is king.” But what’s even more true is cash FLOW is king, as it’s a more accurate measurement of a business’s viability. It’s proof positive that your business is running smoothly.

When a business needs to purchase inventory, expand, or manage any one of 1,000 transactions, cash flow is what matters most. Business bankers can work with businesses to proactively manage cash flow to avoid hiccups when you need cash on hand to do business. Here are a few tips:

  • Shorten account receivables. Your business’s goal is to be paid for your product or services as promptly as possible. The sooner you have cash in hand, the sooner you can turn that into more product or service.
  • Lengthen account payables. Conversely, your goal with payables is to stretch out the time for each account payable to hold on to your cash as long as possible. If you can “sit on” your cash until the day it needs to be gone - perhaps scheduling payments via electronic transfer - it will be available for use for other purposes until then.

The Receivable/Payable Dance

Managing accounts receivables and accounts payables is a dance, really. The sooner you have customer payments in your account, the sooner you can manage and finalize pending orders. Your business banker can review your cash flow process to help you forecast as well as recommend modifications. I recommend reviewing your cash flow monthly at a minimum; unfortunately, many businesses don’t keep a watchful eye on it. More frequent check-ins allow you to assess and react quickly; in fact, many businesses give it a high-level check every day in their accounting software, “eyeballing” it to see if anything unusual pops out.

Here are some recommendations for maximizing your cash flow:

  • Secure payment for your products/services as quickly as possible to improve cash flow. Instead of offering net 30 invoice terms, ask to be paid at the time of service or purchase. If your product/service isn’t provided face to face, consider offering remote/online payment options to make that simple and convenient for customers.
  • Stay on top of invoicing; issue invoices to customers promptly and follow up on unpaid ones regularly.
  • Consider offering a small discount for prompt payment within “x” days of the product/service to incent customers to pay promptly.
  • Ask the vendors you regularly use if they offer discounts for prompt payment as well.
  • When an invoice is due, set up payment via electronic funds transfer for the day it’s due. This stretches the time you have the cash in your account and ensures it’s scheduled.

Why Monitoring Cash Flow is Worth the Time

Monitoring and shifting receivable and payable timelines and cash flow overall is worth the effort for several reasons:

  • Reviewing cash flow is important to ensure your business has enough product/service capacity and enough staff to deliver it. It provides an understanding of your overhead/expenses and how you’ll be able to pay for them at any time during the receiving/payable cycle. It provides perspective and allows for planning if your business requires a line of credit or a term loan to fill in gaps before you need it.
  • Monitoring allows you to plan for the unknown. If your business suddenly receives an extraordinarily large order but doesn’t have the product to fulfill it, that line of credit at the ready can make all the difference between being able to say “yes” instead of “no” to the order.
  • Monitoring allows you to plan for lean months resulting from seasonal fluctuations or other factors. Retailers, for example, often make 60% of their annual sales during a few months of the year. Review your cash flow history and arrive at a reserves estimate that would cover your business for three months, six months, and a year, and plan accordingly.
  • Monitoring allows you to anticipate - and plan for - ups and downs. For the “downs,” you can have a line of credit on standby. On the upside, knowing when to anticipate an upswing in cash flow allows you to plan for new investments - hiring employees, opening new locations and pursuing other means of growing your business.

Obviously, a cash flow statement is only one of several financial statements to monitor and measure your business’s strength. It is an important piece of your overall financial picture, and one worth monitoring regularly.

Written by Anne Denissen

Anne Denissen is Vice President - Treasury Management at Investors Community Bank. She holds a Bachelor of Arts degree in computer science from Lakeland College and has more than 20 years of banking experience. She helps guide each business to solutions that fit their needs, and coordinates the implementation of treasury management services.

Some content requires Adobe Acrobat Reader to view.