Cash Flow

Untying Your Business’s Cash

Where Can You Find Additional Cash?

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Sustainable profitability represents a milestone for many businesses. According to SunTrust Research, small and medium-sized businesses cite growing or increasing profitability as their top goal. While income growth is at the top of the list, balance sheet strength is equally important. That means squeezing working capital and controlling cash flow.  Since 30 percent of businesses plan to use cash on hand to finance their long-term growth strategies, stabilizing cash flow and extracting more cash to invest can enable growth plans. Growing companies look at five functional areas where they can uncover additional cash. 

Expense and overhead

One in five middle market businesses see controlling costs as a top driving factor, with close to one-third planning to reduce costs over the next five years to finance growth plans.  While fixed costs, such as rent, equipment, marketing or utilities, are a constant, they can be managed. The first step in rooting out excessive costs is to divide costs into overhead and production-related categories. Once identified, the following steps will help reduce recurring expenses and improve cash flow.

  • Rely on the knowledge of your employees. Get everyone involved in reviewing overhead costs, using staff experience to identify areas that can be reduced or eliminated.
  • Automate functions such as HR, payroll and purchasing. Electronic systems tighten your company’s control on expenses by providing greater visibility into spending patterns, more secure payments that minimize fraud, and faster, streamlined processing of payables.
  • Go green. Conduct more business electronically to rely less on paper. Transitioning to a paperless operation saves the obvious expenses - paper, toner, ink cartridges, copying and printing machinery maintenance/upkeep - but also storage and filing space, possibly allowing you to downsize your office facility or utilize the newly-available space to support more profit-generating tasks.
  • Take advantage of new technologies. For instance, cloud-sharing and data storage can dramatically reduce IT costs while improving accessibility and collaboration for staff, regardless of where they may be located. Consider leasing equipment versus buying to save on future upgrades and monthly holding costs.
  • Institute a work-from-home program for employees. Thirty-one percent of small businesses offering remote working options do so to save money. Twenty-eight percent utilize the practice to reduce the number of employees physically in the office, thereby reducing their on-premises space and saving on commercial real estate and utility expenses.

Financing customers and suppliers

Even though your profit margins may look good, your cash may be hiding in receivables that finance your customers’ businesses, not yours. Getting on-time payments from clients/customers is one of the top ten factors driving business strength cited by companies. Paying vendors on time is also cited by half of businesses as a top business strength because in addition to tying up cash, your business could be missing discounts or incurring penalties or late fees for slow payment of supplier invoicing. Consider the following best practices to balance out payment terms and conditions while building a stronger cash base and cash flow.

Customer financing

  • Find the shortest payment terms you can extend to your customers without putting yourself at a competitive disadvantage. If you allow your customers 60 days to pay their bills, you are essentially giving them a 60-day loan. Consider negotiating partial-progress payments or down payments for larger jobs or orders.
  • Offer a variety of payment methods to improve options for customer access.  Providing discounts or other incentives for fast payment via certain channels - for instance online payments, credit or debit card payment, or scheduled electronic payments using online bill pay or Automated Clearing House (ACH) transactions - enhance the ability to get cash in the door faster to improve your cash flow.
  • Automate collections to increase efficiency and reduce the cost of processing.  Electronic collections get money into your accounts faster, while lightening the load on your accounting staff and minimizing manual input errors.  Businesses that automate the collection process typically shrink their cash flow cycle by days or even weeks.

Supplier financing

  • Negotiate with suppliers for better pricing, longer payment terms and invoice discounting.
  • Pay vendors and suppliers electronically to control and schedule when you pay, ensure you meet your payment terms, help you qualify for supplier discounts and avoid penalties. Electronic payments also reduce processing time, increase timeliness and accuracy and streamline reporting.
  • Consider paying with credit cards for more payment flexibility.

Payroll expenses

Labor costs vary greatly by industry but often figure as a prominent expense category. The need to attract valuable employees means not scrimping on competitive salaries and benefits.  However, streamlining payroll processes as well as looking at alternative employment strategies can minimize the labor cost impact on your bottom line.

  • Convert to an online payroll system that will streamline, organize, and standardize recurring wage payouts. Online payroll systems save your company money with paperless payments, as well as freeing up employee work hours for other strategic projects.
  • Instead of hiring employees and paying full-time salary and benefits, consider outsourcing portions of your operations to professional freelancers or contractors who have already developed the skills you need for tasks. This practice may also save the business training costs. 
  • Leverage employees work hours by minimizing their downtime. Identify positions that could handle additional tasks and then have the current employee perform duties that would otherwise require hiring an additional person.
  • Use incentives other than base salary and wages. Creating bonuses and incentive compensation tied to business goal attainment enhances employee buy-in and commitment to the company’s overall objectives. Consider non-payment incentives such as special recognition, extra time off, paid parking, or fitness club memberships. 

Inventory carrying costs

Almost half of middle market businesses carry inventory –- whether finished products, components or raw materials. Understanding the four main components that comprise the cost of your company’s Days Inventory Outstanding (DIO) can improve cash flow and realize savings:    

  • Capital: Lower capital costs by renegotiating financing used to purchase inventory. Lower rates and/or longer terms saves interest expense and lowers the value percentage of inventory.
  • Storage space: Maximize the efficiency of your storage space by optimizing your warehouse layout to utilize narrow aisle equipment, allowing more product to be stored in smaller areas.  Install technology to identify/locate materials or products to speed logistics and help move product in and out of the warehouse more quickly. 
  • Inventory service: Service costs, typically insurance and taxes paid on inventory, can be reduced by implementing a pull inventory system (sometimes referred to as Just-In-Time – “JIT”).  By accurately forecasting demand, factoring in one-time events and seasonality, then ordering/receiving goods only when needed, companies can reduce inventory levels, decrease waste and thus lower service cost.
  • Inventory risk costs: Understanding and managing turns in inventory will minimize costs associated with risk by ensuring inventory does not become obsolete, damaged or stolen. The longer your DIO, the more cash is tied up. It follows that smaller inventory levels, turned quickly, will generate more cash for your business.

Purchasing materials

A quality product or service can mean the difference between success and failure. Running a profitable company means your team has found the magic equation that matches the quality of your product, your company’s positioning and the market’s needs. There may still be strategies available, though, that can optimize your purchasing and sourcing without threatening your product’s value:

  • Consider bidding out existing contracts to create competition among vendors. You may find that you can obtain the same high-quality materials you need at a much more favorable price and/or payment plan. Remember, everything is negotiable. 
  • Purchasing in bulk typically offers businesses the opportunity to take advantage of discounted pricing, which saves on materials, and can be factored into inventory carrying cost savings as well. 

Look good on paper and in cash

Implementing cost saving strategies and simple automation tasks can help with managing your cash flow and unlocking tied up cash. Many strategies can be implemented right away, while others can feel a bit overwhelming to contemplate. You don’t have to go it alone. Rely on your partners - like your accountant, your banker or other business advisor - for help and as a source of new ideas. Leveraging your experience with those of influence around you is a winning strategy that will find the extra cash tied up in your business and ensure it will be available when and where you need it.

Are you ready to untie your business’s cash?

Ask your SunTrust Relationship Manager how SunTrust can help you untie the cash you need to grow your business.

SunTrust Research with 255 businesses (annual revenue between $2 million and $9.99 million) conducted in Q1 2017.

This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

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