We’ve said it time and again—the state of a company’s cash flow is among the most significant metrics that every CEO or business owner should track. That’s because cash flow “is a key indicator of the financial health of your business,” as Wells Fargo notes. “A consistent, positive cash flow can help you pay expenses, invest in new opportunities, and grow your business.”
As business agendas go for 2022, you can’t do much better than that.
1. Look at where your finances are today.
There’s no better time than right now to closely review the cash flow situation within your company. As we have suggested before, “Ask your finance team to closely scrutinise all areas where money is being spent.” In fact, consult anyone in the company who has “a close financial understanding of your business” to help you “re-set priorities that emphasise cost reduction, not spending.”
2. Take a strategic approach to paying bills.
It might sound counter-intuitive but trying to pay bills as soon as they come in isn’t necessarily the best strategic approach to boosting cash flow. Focus instead on making payments based on priority of importance to the business (rent, payroll, etc.). When possible, stagger payments to avoid feeling pressure to pay everything at once.
Speaking of paying bills, the start of a new year marks a good occasion to renegotiate contracts with your vendors. Pin down just how much is regularly spent with these suppliers and then investigate what competing vendors might charge for the same types of products or services.
Suppliers who want to retain your business will usually be amenable to offering discounts or a flexible spending plan that allows you to keep a healthy cash flow in place.
3. Encourage prompt payment from customers.
Having a steady flow of incoming revenue is essential to healthy cash flow. That’s where accounts receivables come in. The management accounting firm GrowthForce recommends several actions you can take, including:
- Request an initial deposit or partial payment at the beginning of a project with a new client.
- Alter your accounts receivable system so that clients receive your invoice immediately upon delivery of products or services, instead of invoicing for services rendered on a pre-specified day of the month.
- Do a comprehensive evaluation of past due clients and take action to make the appropriate payments, even partially or in a staggered payment schedule.
Finally, do all you can to make customer payments easier to complete, as, for example, through mobile or electronic payment options.
4. Keep a close eye on inventory.
Products that sit in inventory for long periods of time represent a potentially significant drain on your company’s cash flow.
“Do you have slow-moving or obsolete inventory on hand?” asks Peter Wares, Owner at TAB Windsor-Essex, Chatham. “If you do, get rid of it! Sell it off at a discount. Otherwise, it will just sit there collecting dust.”
5. Do a better job of forecasting.
In many cases, companies have sufficient experience to engage in detailed financial forecasting for the year (or years) ahead. Scott Morris, Director at TAB East Auckland, offers these methods to make forecasting easier:
- Do it quarterly.
- Group accounts into categories.
- Trends are your friends — use rolling three months and rolling 12 months when possible.
- Measure actual against forecasts each month to improve your forecasting skills.
- Work with a trusted advisor.
“If your forecast shows that your company is not generating cash for the business, you know it’s time to take action on your expenses, working capital, or capital expenditure budgets,” adds Peter Santry, Owner at TAB Fairfield County, Connecticut.
Want to learn more about maintaining a healthy cash flow in 2022? Check out our free TAB Boss Webinar, “How to Take Control of Your Cash Flow with Forecasting.”