Control Cash Flow

Simplicity and Complexity of Managing Cash Flow

Simplicity and Complexity of Managing Cash Flow

Business owners thinking about cash flow often follow a similar thought process.  What is enough? What is dangerously low?  What if I end up with more? What are the key levers to change direction? These are the questions that many owners consider when thinking about cash flow.

Cash flow is the “steady and continuous movement” of cash in a business operation.  When considered this way, cash flow sounds simple – like regulating the temperature in the office or maintaining customer service levels. While almost half of businesses in recent SunTrust research indicate strong confidence in their cash flow, an equal number reflect ongoing challenges with forecasting and managing cash flow.

Average length of cycle, turns per year, and average cash on hand are all measures used to assess the nature of the movement of cash through a business from inception of product or service to delivery of and payment for that product or service. For most businesses, the idea of “steady and continuous” may in reality have plenty of peaks and valleys.

All businesses experience some difference between average and actual cash flow levels, and in many cases, cash flow variations reflect healthy business activities, such as:

Opportunities and investments.  Inherent with many opportunities is the need for cash that may not be precisely projected: the opportunity to purchase a key raw material in greater bulk at a significant savings; the opportunity to get a great deal on a key piece of new equipment; the opportunity to acquire a struggling competitor’s assets. These inherent investments are positives – signs of strong opportunities, and yet, they create a volatility that needs to be managed.

Seasonal Dynamics. For many businesses, there is an often predictable seasonal dynamic of supply, demand and market forces. Weather, holiday sales, travel seasons are all examples of market dynamics that can cause 1 – 3 month swings in business activity and throw a curve into cash flow averages.

Business Volatility. Especially for businesses with long sales cycles or less foreseeable product cycle times, cash volatility can become expected and begin to resemble a routine part of everyday business.

SunTrust research suggests that none of these volatility triggers needs to become routine. Many companies are successfully monitoring and proactively managing these dynamics so that while the volatility curve may still exist, it is minimized and anticipated. By focusing on the four primary dynamics of cash flow movement, businesses can gain more control over their cash flow ebbs and flows. 

Buy Smarter

By buying smarter, companies can create enhanced control over the price paid, terms of the deal and the flow of payables – all of which can benefit cash flow. According to SunTrust research, roughly one out of five companies pays late penalties to suppliers on a regular basis. The cost of penalties must be stipulated in the sales contract, but can add a significant annual interest rate to the outstanding invoice causing an increased cost of goods. 

Many companies have recognized that electronically managing purchasing improves the flow of goods and services and control over payables. Purchasing software allows employees in different departments to follow a proven process for researching pricing, approving suppliers, generating purchase orders, scheduling payments and reconciling invoices to the purchase orders.

With the rise of purchasing cards, business credit cards, and other specialized credit cards, it is easier for employers to track what they are paying and manage payment cycles. Purchasing cards provide more detailed statements that can be easily reconciled to invoices to improve accuracy and electronically manage payables.   Some also offer control features to direct and limit the use of the card to control spending and prevent fraud.

Control Expenses

Purchasing is a business function that is often delegated to many employees in small to mid-sized companies. Individual departments identify what they need to get their specific work completed, and they exercise significant influence (or direct control) over purchasing and approving business services, inventory items, or sales training. Consequently, negotiation for the best value (price, delivery and terms) may not be consistent across the company and can impact cash flow. SunTrust research suggests that stronger supply management systems are an area of opportunity for businesses to control expenses. With less than half of companies engaging in some of the following types of activities, expense control has the potential to improve cash flow for many companies.

If your organization is not involved in bidding out key expenses, take the time to identify the top contributors to your total costs. In many cases, medium-sized companies are hesitant to “bid out” complex services such as IT services, building maintenance/security and employee benefits, and yet, there are outsourcing agencies set up to affordably and expertly evaluate and negotiate these services.

Forecast Sharper

Forecasting is both art and science requiring many inputs. With roughly half of businesses (54 percent) saying they regularly forecast the amount of cash needed to run the business, SunTrust researchers looked for signs of what the other 46 percent could do to forecast more accurately.

Fragmented information is a significant barrier to sharper forecasting for many businesses. An integrated banking platform allows companies to integrate reports that control various aspects of the “demand-side” of business (sales, revenue, accounts receivables) with the “supply-side” of the business (purchase requisitions, expense accounts, accounts payable) to provide greater visibility across the many dynamics that impact cash flow.

Collect Faster

The days of “the check is in the mail” have changed dramatically. For starters, recent USPS changes have resulted in a slower flow of checks from customers. In some parts of the country, checks are taking an extra day to arrive and even longer in some cases.  In addition, customers now expect electronic options for payment because it helps them control their cash flow.

Depending on your mix of payments, collection automation can take different forms.  Businesses with large mailed check volumes can rethink their payment processing strategy to look at lockbox services to post receivables more quickly.  Accepting credit card payments can help you collect faster, grow sales and save time billing, collecting and depositing.  Billing and electronic collection through online banking services and ACH transactions can inexpensively and easily provide automatic payments and speed up collections.

Looking Forward

As global markets increasingly open to mid-sized companies for improved sourcing or new customers, the complexity of managing cash flow will increase. The ability to manage both the inherent and the unexpected volatilities of cash is critical to seizing growth opportunities – domestically and internationally.

By focusing on these four factors of cash flow, businesses can smooth their everyday cash volatility – making it easier to take advantage of opportunities and investments that will inherently challenge cash flow.

Your SunTrust banker is ready to discuss cash flow at your company and can help you make plans to ensure that your cash management tools support you in reaching your short and long-term goals.

SunTrust conducts quarterly research on business topics relevant to its small and mid-sized clients. This research was conducted in April 2014 and surveyed 259 small businesses ($2mn to $9.99mn in annual revenue) and 260 mid-sized businesses ($10mn to $150mn in annual revenue).

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.