Cash Flow Management Strategies: Tips and Services to Boost Your Working Capital

Whether your business is growing or your sales are declining, an effective cash flow management strategy is crucial for maintaining working capital.

One thing is true for companies of any size: your business relies on a healthy cash flow to operate, plan for emergencies and grow. Ensuring a ready supply of working capital is a mission-critical task for every organization.

Cash flow problems happen when you spend money faster than you’re getting paid (learn more about signs that you have a cash flow problem here). If your business is changing or you’re experiencing the following, it’s probably time to re-evaluate your cash flow management strategy:

• Sales are increasing but outstanding invoices are piling up.

• Sales and business growth are slowing down.

• Your expenses are getting higher.

• Interest rates are increasing.

• Customers are asking for longer invoice payment terms.

• Your business decisions aren’t informed by financial data.

A smart cash flow management strategy will help you maintain working capital, improve operational efficiency and give your business stability in uncertain times. Here are some top tips to improve your cash flow management strategy.

1. Monitor your cash flow

Cash flow is the measure of money going in and out of your business. While it’s a good practice to monitor your payables and receivables frequently, forecasting your cash flow will also help you predict cash inflows and outflows over a period of days, weeks, months or quarters.

This allows your business to predict cash flow shortages and make more informed, proactive financial decisions based on reliable data. It also enables you to pay bills on time, plan growth strategies, maximize your surpluses and maintain good standing with shareholders. If you’re not confident in your accounting skills, get your accountant to build and review the forecast for accuracy. If you want to create it yourself, here’s how.

Include the following metrics in your cash flow forecast or management strategy to give yourself a quick snapshot of how your cash flow is performing:

• Operating cash flow: shows you whether you’re making enough money from your operations to pay your bills.

• Cash ratio: measures your business’s liquidity and ability to pay off short-term debts.

• Cash conversion cycle (CCC): measures how long it takes your business to turn inventory and other investments into cash flow from sales.

• Days sales outstanding (DSO): the number of days, on average, it takes to collect your receivables.

• Available working capital: measures the immediate cash you have to cover short-term expenses and invest in growth opportunities.

• Free cash flow (FCF): the cash you have left after accounting for capital expenditures — essentially, how much you have to invest in and expand your business.

It’s important to review your forecasts and financial metrics regularly to inform your business decisions. As a best practice, all businesses should forecast and track metrics to monitor cash flow and assess whether their management strategies are working.

2. Re-evaluate your business operations and expenses

Cash flow metrics and forecasting give you a starting point to evaluate your current business operations and expenses. For example, do you have a generous free cash flow? This could indicate an opportunity to make smart investments that will help grow your business. Is your cash conversion cycle too long? It might be time to re-evaluate your sales and marketing strategy to turn products over faster.

The goal of this tip is to take a hard look at your business and assess where adjusting your operations or expenses could improve cash flow. This will be different for every business, but here are some questions to consider:

• Where does it make sense to reduce expenses? This could mean negotiating lower prices with your vendors, renting instead of purchasing equipment or contracting instead of hiring staff.

• Do you need to get paid faster? Digitizing transactions, renegotiating payment terms or using early payment incentives can all reduce payment periods and increase cash flow.

• Which parts of your business need more resources? Evaluate which business investments or changes will give you the best return on investment (ROI).

• Are there technologies that can streamline your processes? Research innovations that could make your operations more efficient and support positive cash flow.

Sometimes evaluating where there’s room for improvement is an inefficient process in and of itself. Emerging process mining solutions can help you identify and address inefficient business operations faster and more accurately than manual assessments.

3. Set aside an emergency buffer

Ideally, your business should have enough working capital set aside to manage cash shortages and other unexpected emergencies. Financial advisors typically recommend having three to six months’ worth of business expenses saved as an emergency buffer.

If you’re struggling with cash flow issues, the tips covered in this article should put you on track for increasing your working capital and building a reserve. However, this isn’t always possible in your cash flow management strategy — especially for small to midsize businesses that need additional funds to grow. In this case, securing other forms of financing can serve as a backup plan when cash runs low. The trick is to access these funds proactively, not when you’re already in a crunch.

4. Change your invoicing strategy

Increasing profits and cutting expenses might be top of mind when you’re evaluating your cash flow management strategy. However, your invoices also offer a valuable opportunity to increase cash flow. If you can get paid sooner, your business is less at risk of a cash shortfall.

Simple steps, such as renegotiating shorter terms with your customers, sending invoices sooner and reviewing them carefully for errors, can promote faster payment. You can also use early payment incentives, such as C2FO’s Early Payment program, as part of your cash flow management strategy. Early payment programs give customers a small discount in exchange for paying earlier than your agreed terms. 

Early payment incentives allow you to increase cash flow without taking on debt. They also give you more control over when you get paid, so you can improve financial metrics such as CCC and DSO. Invoice discounts are usually more cost-effective than other working capital solutions such as business loans or lines of credit.

The takeaway

Cash flow issues are a perennial issue for many companies. If you want to avoid this situation, an effective cash flow management strategy is a must — even when your sales are climbing. Tracking financial metrics and forecasting your cash flow should be a part of any management strategy, along with continuously streamlining business processes and saving an emergency buffer when possible. 

Whether your business is growing or shrinking, minimizing how long it takes to receive customer invoice payments could be an effective part of your strategy. It can also make a huge difference in your working capital and help you take control of your cash flow.