10 strategies for better cash flow management

What if you could access capital tied up in your company’s day-to-day operations? Could that cash help expand your business, pay off debt obligations, or make distributions to owners?

Effective cash flow management can provide you with opportunities to lower capital costs through smart fiscal planning, timely cash movement, and integration of your operational and financial systems. You’ll have more control over short-term operating cash flow and funding for strategic growth, reducing your liquidity needs, and boosting your returns on capital.

Learn more about cash flow, and then follow our top 10 strategies to improve your company’s cash flow management.

Because cash flow is at the center of your business’s financial health, it’s important to find ways to effectively manage and improve it.

What is cash flow?

In its simplest terms, cash flow is the amount of cash and cash equivalents that are transferred in and out of your business, and it’s often tracked weekly or monthly.

When you have a positive cash flow, your business brings in more money than it spends, giving you enough cash to cover your operating expenses and pay for business improvements. When you have a negative cash flow, your business is spending more than it’s bringing in, which puts you in the precarious position of dipping into your reserves to cover basic expenses like payroll.

But there are more factors to consider than simply cash in and cash out. Understanding and managing your cash flow requires answering questions like: How quickly do your customers pay you? And how long does it take you to put that money to work for your business? You also need to consider these three cash flow cycle components:

• Velocity: How much time passes between ordering raw materials and collecting payment on your finished product? That’s your cash flow velocity. If it takes 10 days to receive materials from your supplier after processing, 10 days to produce your product, and 25 days to collect payment from your customers, your cash flow cycle is 45 days. You’ll have to keep working capital in your business to fund operations that entire time. At that rate, your company can move through nine cash flow cycles a year. If your sales increase, you’ll need access to more capital to fund the purchase of raw materials and increase production, knowing you can’t shorten your cash flow cycle’s 25-day payment collection phase.
• Volume: Gross margin drives cash flow volume. Profits are determined by how well you manage your direct material and labor costs. Use your working capital efficiently to generate the highest possible profit margin from each cash flow cycle.
• Indirect costs: More overhead means less cash for your business. Indirect costs like raw material spoilage, inventory shrinkage, receivables sent to collections, and idling workers can drain your resources. Assessing and controlling these costs will increase your cash flow.

Because cash flow is central to your business’s financial health, it’s important to find ways to effectively manage and improve it.

Manage your cash flow effectively with these 10 strategies.

1. Link your capital strategy and long-term goals.

Consider your business plans for the next three to five years when developing your capital strategy, as this will help you set your cash flow goals. Think about where you are now and where you want to be with your business, then determine what your cash flow should be in order to reach those goals.

There are several formulas that can help you analyze your company’s current and projected cash flow.^{Disclosure 1} Which formula you use will depend on your business situation.

2. Constructively manage your working capital.

Your working capital is the sum of your cash flow and your non-cash assets, minus your liabilities, and it’s what you use to do business. As you’re thinking about ways to boost your working capital through better cash flow management, keep in mind these three factors that affect cash flow:

Days Sales Outstanding (DSO): The average number of days it takes to receive cash after customers make a purchase using credit.

Days Payable Outstanding (DPO): The average number of days the business takes to pay its creditors and vendors.

Days Sales in Inventory (DSI): The average number of days it takes to convert inventory into sales. Also known as Days Inventory on Hand (DIH).

Consider tightening up on accounts receivable deadlines to pare down your DSO. Stretch your accounts payable timeline for greater DPO, and minimize inventory for lower DSI. With the latest integrated payables workflow and electronic payment capabilities, you can heighten visibility, improve real-time data availability, and strengthen controls at reduced transaction costs.

3. Update your investment strategy.

Rethink policies and goals that shape your investment decisions—from cash flow strategies to the timing of equipment purchases—and examine them against the current economic climate. Gather a team able to maintain your investment strategy and capable of making decisions based on liquidity.

4. Invest in a reliable financial management system.

Cash management strategies are only as good as your financial management system. If it’s been a while since you upgraded to a new system, you could be at risk of data losses, data breaches, limited reporting capabilities, and slow processing speeds. A modern financial management system can solve those problems while providing:

• Consolidated snapshots of money from all funding sources in all accounts
• Customizable solutions for managing and controlling your cash flow
•  Advanced capital planning capabilities
• Financial statements with greater depth of insight
• Increased efficiency and reduced waste
• Improved forecasting and scheduling
• Enhanced data security

5. Make payments electronically with just-in-time technology.

More companies are turning to electronic payments for B2B transactions. A 2022 survey by the Association for Finance Professionals found that only 33% of B2B payments are made by check, down nine percentage points since 2019.^{Disclosure 2} Additionally, businesses report a preference for paying major suppliers by electronic means, with 75% of respondents saying that doing so positively impacted their businesses.

Your business can hold on to cash longer by making one-time and recurring payments via electronic payment technologies like ACH and wire transfers. By releasing funds for business expenses at the last possible moment without being late, you can:

• Enhance cash flow management.
• Reduce accounts payable workload.
• Fine-tune cash flow forecasting.
• Streamline account reconciliation.

6. Reduce your capital needs with better cash flow forecasts.

Your business requires capital to operate, but the more you can reduce the amount you require, the better your returns will be. Freeing up additional capital will release cash and boost your company’s value. That may mean lower interest costs or higher owner returns, depending on your capital mix.

What are some ways you can lower the amount of capital your business needs?

• Reduce inventory carrying costs: Storing and handling raw materials, unfinished goods, or finished products can tie up capital. Improve delivery speed and lower your inventory levels to increase cash flow.
• Alter payment terms for customers and suppliers: Reduce payment terms for your customers and extend your supplier payments whenever possible.
• Finance equipment and real estate: Capital-intensive industries that are dependent on heavy machinery, specialized tools, and costly facilities absorb a lot of cash. To reduce costs, consider financing equipment or real estate through capital sources like leases, conventional loans, lines of credit, and SBA loans.

As you adjust your capital requirements, pay close attention to seasonal and cyclical cash flow patterns so that you can invest in growth without running low on capital at a critical time for your business. Generate financial reports and cash flow statements on a regular basis in order to maintain a sense of your company’s working capital requirements and allocate funds accordingly.

7. Collectively manage all your accounts.

Find out which of your accounts have surplus capital and move it to where it’s needed. Consolidating funds from multiple sources prevents excess cash from building up in unproductive accounts and reduces your need for a line of credit. It also makes it easier to reconcile your receivables data.

8. Use digital tools.

Advanced banking and accounting technology will make it easier to track and manage cash flow, enable your staff to complete financial tasks faster, and ensure faster, safer, and cheaper electronic transactions.

• Online banking: Knowing how much is in each of your accounts and managing when, where, and how you spend that money is crucial to your company’s health. With online banking, real-time information on all your accounts is instantly accessible through a secure connection that allows you to view current and prior balances, as well as pending and posted transactions.
• Integrated accounting: Your bank and credit account data can be uploaded into an integrated accounting system. This system helps ensure that reports on your accounts provide accurate and up-to-date information so you can confidently make decisions affecting your cash flow.

9. Collect your financial data for predictive modeling.

Electronic payments and other financial transactions create data footprints, and you can use this digital information for internal accounting, reporting, and forecasting of your cash flow needs. Predictive modeling software uses a combination of artificial intelligence and machine learning to slice and dice vital business data in order to answer critical business questions, including those related to capital management and cash flow. Good modeling software can spot patterns that regular reporting and analysis can miss, leading to greater accuracy in the forecasts that can help improve business decision making.

10. Use fraud prevention technology.

According to the 2023 AFP Payments Fraud and Control Survey, 65% of businesses were the victims of payments fraud attacks or attempts in 2022.^{Disclosure 3} Digital fraud prevention programs and software can protect your company’s cash flow, especially when combined with predictive modeling that can help identify fraud before it happens.