Jared King

The 3 Pillars of Mastering Cash Flow Management

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Managing cash flow is one of the most difficult financial balancing acts that any business faces. From our perspective, having helped more than 20,000 small and medium sized businesses address cash-related challenges, we see three important areas where true mastery of cash flow management is achieved by the best businesses:

 

1. Measuring cash flow

The first big challenge is measuring cash flow. It often takes a lot of manual effort and countless spreadsheets just to understand cash flow at any given moment. With expenses getting paid, revenue coming in and, often, no single source of truth for current cash flow, business owners and managers can spend a lot of time just finding out the answer. It becomes especially difficult when credit sales are in the picture.

The best practice for businesses on this front is making sure that the ERP or accounting system is tightly in sync with expense/payable systems, billing/collection systems and ecommerce/POS platforms. When this trio of critical systems are tied back to the ERP or accounting system, it can save hours of work in understanding the cash flow situation at any given moment. The best businesses can easily report on key cash flow metrics like DSO (days sales outstanding), ART (accounts receivable turnover) and overall collections efficiency with the click of a button.

 

2. Improving cash flow

The next big challenge, once your business is adequately instrumented to measure cash flow is improving it. Having helped thousands of businesses automate and track various cash flow related processes, it’s easy for us to see that the companies who take deliberate, digitized steps to accelerate cash-related financial operations generally see improvement in key cash flow performance metrics, sometimes dramatic improvement.

Since all business is going digital, as are your customers, electronic and automated systems are rapidly paving the way for improved cash flow performance. For example, on the billing and collections side, we see a cash flow metric like DSO dropping by 14 days on average among companies who implement such a solution. In many industries, that 14 days can be the difference between below average performance and head-of-the-class status.

 

3. Predicting cash flow

Lastly, the ultimate cash flow challenge is being able to predict what will happen in the future. Many small and medium sized businesses have a lot of control and predictability when it comes to expense payments going out the door. But far fewer have any level of predictability when it comes to cash receipts. To achieve this ability to see into the future, it requires bringing together different kinds of codifiable payment information, especially for credit sales. What bills are going out? When are they due? How much are they for? What payment methods are expected? What are the customers’ individual payment histories and performance ratings with my business? These data points are generally all knowable but, often, too widely scattered to make any sense of. That’s where, again, digitization and the use of software tailored for that specific task can be a boon for businesses.

From our vantage point, using the right software to predict cash flow saves controllers, CFOs and other accounting/finance staff, in some cases, multiple days per month previously spent doing complex and highly imperfect calculation of expected cash receipts for a given period. And what’s even better is that they’re forecasting with vastly improved accuracy.

As you can see, mastering cash flow isn't a one-dimensional feat. It takes multiple disciplines and the right infrastructure to do well. Once you make those investments and get a handle on these key areas, you're sure to be able to manage, measure and predict cash flow with far greater ease and success.

 

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