What Growing Companies May Find Interesting About Cash Flow Management

As finance professionals say, “Revenue is vanity, profit is sanity, but cash flow is reality.” It’s an old adage in business, but its importance remains today. As it was reported in our survey, the American Express Survey of Mid-Sized Companies, 83 percent of decision makers at mid-size US companies surveyed said they expect cash flow issues to arise over the next six months1. But it’s not just access to cash that might be keeping decision makers up at night—using smart cash flow management choices to fund growth should also be a priority.

No matter how healthy your top line may be, your next growth initiative could be short-lived if your cash flow isn’t stable. Fortunately, there are a number of tools, tips, and best practices that may prove useful when prepping your business for growth.

Make Accurate Forecasting a Priority

More than two-thirds of decision makers at mid-market companies surveyed by the American Express Survey of Mid-Sized Companies2 identified one of three concerns with cash flow: accurately tracking funds, having enough cash on hand to create new business, and collecting on accounts receivable. Addressing these issues is important for the health of any business—and perhaps even more so for businesses looking to scale. If one or all of these concerns applies to your business, you may want to start by examining your working capital cycle.

According to Lee Swinerd3, this area can be a stumbling block for growing businesses. Swinerd is Director of Turnaround and Transformation at KPMG UK and previously established the firm’s US Restructuring practice in New York. As an expert in cash and working capital management, Swinerd has seen many mid-sized companies underestimate the importance of developing accurate forecasts for their working capital cycles.

“Many middle market companies in the US have a global supply chain,” Swinerd said. “They may receive 30 days of credit from American suppliers, but when they’re working with suppliers in China, for example, that timeframe can be much shorter.” Meanwhile, Swinerd added that collecting receivables from enterprise customers can sometimes take up to 90 days—or longer. Swinerd stressed that accurate forecasting is important for understanding how—or if—your business can finance a working capital cycle of that nature.

To get additional help with understanding and managing your working capital cycle, consider a payment solution that extends payment cycles. Such a solution may be able to help your business avoid overcharges, which could help your business create more reliable working capital forecasts. 

Change How You Think About Payables and Receivables

Once forecasting is done, consider rethinking how you’re distributing your payments to suppliers and vendors. Prioritizing them by due dates and interest rates and structuring your payables accordingly can improve the flexibility of your cash flow. Remember: you may not necessarily need to pay your vendor today if payment isn’t due for 30 days. Think about utilizing a program or service to help your accounts payable department make the payments process more efficient.

When pursuing receivables, it may be beneficial to some companies to make an effort to invoice quickly, and consider offering incentives for faster payment – but be cautious. Offering a slight discount for early payments may be effective for certain companies, but Swinerd cautioned businesses against offering such discounts. “For businesses with small margins, [discounts for early payment] may not make sense,” he said. “Make sure your margin can cover it.”

Give Your Accounting Team Better Resources and Support

When it comes to smart cash flow management, the accounting team can be a great resource—so make sure they’ve got the tools they need to succeed. A good place to start is by looking at your team’s tech resources, and you may want to consider fixes instead of settling for “good enough.”

One cause of cash flow headaches is unreliable expense accounting. And for good reason: according to the American Express Survey of Mid-Sized Companies, 40 percent of decision makers reported that their employees who travel find and book their own fares and accommodations4. This can be great for the travelers themselves, but it can be a nightmare when it comes to reconciling travel and entertainment expenses. If this sounds familiar, try talking to your traveling employees about how they’re tracking and reporting expenses. You may also find that your expense accounting system is in need of an upgrade.

And don’t stop there; look beyond the immediate challenges and consider how improving your tech resources can help make your cash flow more manageable.

The Takeaway

When it comes to cash flow management, there may be no need to lose sleep. Looking for opportunities to improve your processes and resources, giving your finance and accounting teams cash flow management tools, and learning the rules of the road when expanding abroad can help support your growth initiatives.  

Sources

1. The American Express® Survey of Mid-sized Companies was completed online among a sample of 339 financial decision makers in U.S. Mid-Size Companies, defined as having revenues of $5 million to $1 billion annually. Interviewing was conducted by Ebiquity Research between June 2 – 19, 2014.

2. 2014 American Express® Survey of Mid-sized Companies.

3. Personal Interview of Lee Swinerd, Director of Turnaround and Transformation at KPMG UK. Conducted by Contently Media LLC (October 20, 2014)

4. 2014 American Express® Survey of Mid-sized Companies.