Core Competencies for Optimized Cash Flow

The ability to optimize cash flow is a priceless asset to any business, especially for those looking to grow. But optimization depends on building a cash management culture where every team member can contribute.

Cash flow optimization is a relatively simple concept. To be successful, a business must generate more cash than it expends. However, the details of optimization are more complicated than that, and any small business owner knows that it’s much easier said than done. Expenses continue to build, and cash-consuming day-to-day tasks take up valuable resources that could be spent on growing the business.

It’s not just the responsibility of the person in charge. To implement an effective cash-flow system, the entire team needs to be aware of the best strategies to increase available resources and profits. This is especially challenging when not all team members are particularly financially savvy, so systems must be put in place to keep the culture focused on optimization.

Below are some core competencies for optimized cash flow, and they apply to each level of the business—not just its leaders.

Setting up quality reporting and analysis

When fostering a cash management culture within your business, your team needs a reporting tool that’s both accessible to everyone and can generate useful reports on cash-flow data. This information is crucial for allowing you to forecast the future in any reliable way.

As a report from Deloitte suggests, your cash flow reporting system should involve connecting your income and cash-flow statements to metrics on your balance sheet, including things like days inventory on-hand or days payables outstanding. Also, evaluate payments for debts and other expenses and include everything in your reporting method so that you have a full picture.

One model to implement is known as financial planning and analysis (FP&A), which is used by businesses to provide visibility into where the company has been, where it is currently, and where things are headed. FP&A asks: What patterns exist with both incoming and outgoing assets and receivables? How can these factors become aligned with working capital? What trouble spots currently exist, including things like late payments?

Once all of these factors have been identified, it’s crucial to continue to monitor these baseline metrics to see what changes. The data analysis will then lead to more successful actions and decision-making to optimize cash flow.

Making sure your payment terms are aligned

One big problem that many entrepreneurs face is allowing vendors or creditors to receive payments within different periods than the customers who are paying the business. For example, vendors receive payment within 30 days, while clients are paying you within 45. This can create problems with cash flow because you can run out of funds to pay your bills on time.

Create a company policy that all payables and receivables are aligned in their payment terms. It will save a lot of headaches for your team and the effort of tracking down funds.

Checking around for the lowest prices

A great way to engage team members in cash-flow planning and problem-solving is to assign someone with expertise about vendors and suppliers in a given industry to find lower-cost suppliers. While the quality of services should be a top priority, it’s possible and likely that you’re not getting the best deal out there, and changing suppliers may not impact quality.

Lowering expenses is an effective strategy to improve cash flow, so start by brainstorming areas where you could save money, however small.

Not relying on snail mail

Another way to optimize cash flow is to stop using snail mail to send your invoices. Many electronic tools allow you to send and receive funds, speeding up the entire billing process substantially. There are also vendor management platforms you and your team could use that offer vendor portals, where invoices are uploaded, and electronic transactions are managed. Sometimes these systems are automated, meaning transactions can happen much faster, if not instantly.

Aligning your funding and expenses

Every business has both short-term and long-term expenses. But each of these need to be aligned with actual sources of funding (both short- and long-term), so that the two match and you can ensure that the cash needed to handle obligations is accessible.

Part of managing a small business is making sure that cash flow is optimized, leading to sustainability and long-term growth. These core competencies will help you and the entire team stay aligned on how to improve cash flow now and long into the future.

When you need assistance implementing procedures and systems to grow your business, the team at Provident CPA & Business Advisors can help. We also assist with tax minimization strategies and deploy the Entrepreneurial Operating System (EOS) for any industry or business model. The EOS helps align teams under a straightforward, achievable vision. Contact us today to get started.