Feeling Flush? Or Flushed?

In these times of widespread concerns about inflation, one of the most important things business leaders can do is carefully maintain their cashflow stability. But did you know this is a key area where many businesses struggle? According to reporting from QuickBooks, as many as two out of three business owners regularly struggle with cashflow issues. About a third of these firms are unable to make necessary payments because they don’t have enough funds.

Let’s take a dive into why this is such a prevalent problem and what types of things can be done to prevent it from happening.

Why is Cashflow Such a Struggle?

Poor cashflow can be caused by an array of different factors, often more than one. But there are several common threads that can be found when examining the reasons behind reduced revenue:

• Zero Reserves. Most businesses (about 9 out of 10) would need to take action if they experienced a two-month revenue loss, according to the Federal Reserve. That’s why experts recommend conducting a long-term cash forecast and building up a six-month stockpile to cover expenses.
• Late Payments and IOUs. More than 9 out of 10 businesses experience late payments from their customers, according to Atradius, a company that specializes in debt collection. It is estimated that at 90 days overdue, these late payments could be worth only 20% of their original value.
• Not Informed. QuickBooks estimates as many as 6 in 10 business owners do not know how much they spend each month, nor do they fully understand how much inbound revenue is deposited into their accounts.

How to Protect Cashflow

To learn more about how to preserve a company’s cashflow, we reached out to Dan Magura, vice president and senior business banker with Munster-based Peoples Bank.

“There is no one silver bullet to cure cash flow issues. It is a constant monitoring of operations, production, and expenses. The best business owners take as much care with understanding and recording their financial information as they do with providing their product or service. Only then are they able to know which efforts have been successful and where they can make improvements,” Magura said.

Specific recommendations include:

Contingency Planning and Awareness. Business owners need to become completely informed about their monthly inbound and outbound cash. As Magura explained, “Every business owner needs to understand their asset conversion cycle from raw materials or services to conversion of the final sale. To help build cash flow reserves, most business owners need to understand matching payables to receivables in the collection process. This can help reduce borrowings and improve cash flow. This also helps clearly identify profitability on each product or service and when the business owner can reduce or increase pricing.”

Tighten Accounts Receivable. Improvements to accounts receivable can get companies paid faster and more reliably. Some of the most common suggestions in this area involve requiring upfront deposits on larger projects or work and implementing discount policies for customers that pay their invoices earlier. Magura also recommended looking into outside services that can eliminate many of the late-payment headaches.

“Treasury Management Services at any institution can greatly improve cash flow,” Magura said. “Treasury Management, or “TM Services,” are designed to make it easier to pay and receive payments for products and services. No longer can a client claim a check is in the mail when a company can easily and safely transmit payment electronically to your account. Conversely, the business owner can control when and where they decide to repay for subject material or services.”

“For example, let’s imagine a daily revenue for a company is $1,000. If they were able to receive payments 10 days quicker throughout the year, thus a 35-40 day conversion cycle, they’d have access to an additional $10,000. Also, if they can delay a payment of say $500 as a daily amount by two days, they would improve cash flow by a total of $11,000 just by utilizing TM Services. This often happens with little to no effort,” Magura explained.

Review and Monitor Supply Chains. Always be on the lookout for new vendor and supplier options, because supply chain strength might very well be the lynchpin that keeps a company’s cashflow in the black. A diverse body of vendors, shippers, and suppliers will help insulate a business from disruptions.

Hold on to Your Wallets

There’s little doubt that inflation and economic uncertainty lie ahead for every business this year. Making sure that cashflow stays solvent will be an essential step to keep companies safe from whatever scenarios may come. It just might be the most valuable financial decision for 2023.