FirstBank & Trust
Evaluating and Managing Cash Flow

Key considerations to keep in mind when evaluating your business’ cash flow.

When operating a successful business, understanding what impacts cash flow within your organization is key. Below are several areas to help monitor your cash flow, and provide guidance on how to fix issues over time. By considering the following, you will be able to respond to changes in a timely manner and properly plan for future expenses.

Working Capital

McKinsey & Company shares1 that having some basics in place around working capital can release an unexpected amount of cash.

“That’s everything from the discipline around how you pay your suppliers’ invoices on time—not too early, not too late, but directly on time—to things like the invoicing process on the receivables side.” Even in times of strong business growth, when budgets for projects are seemingly free flowing, understanding the cost benefit of major projects is crucial to safeguarding cash flow. Knowing how quickly your customers pay and, when possible, obtaining longer vendor terms, can reduce the gap between when a vendor needs to be paid and when a customer remits their payment.
 

Product and Service Fulfillment

Evaluate your business’ ability to increase or decrease speed in fulfilling your customer requests. Key questions to ask yourself include:

  1. What types of delays or risks are you seeing with your suppliers or your team’s ability to fulfill orders that need to be monitored and managed? 

  2. What kind of backlogs or changes in product quality are emerging that might be leading to getting paid more slowly?

  3. What is the cause of a customer’s order being delivered late or short-shipped?  Is it a capacity issue or access to raw materials?

Collections

Collecting funds is essential to maximizing cash flow. If cash flow is light, ask yourself these questions: 

  1. How are your collection trends tracking? 

  2. Are customer orders fulfilled on time and in full?

  3. Are your collection metrics stable, or are they erratic and putting more pressure on short-term cash flow?

  4. Would a customer remit payment in 7-10 days for a discount?

Discretionary Expenses

One of the most overlooked areas of cash flow that can derail business success is discretionary expenses. Travel, entertainment and technology-enabled expenses are individually modest amounts in most cases, but they add up over time. Take a closer look at where this spend is occurring:

  1. What trends are you seeing in discretionary expenses such as travel and entertainment? 

  2. Are you noticing growth in any new categories of expenses? For example, are employees using web-based ride services such as Uber when they may not have in the past? 

  3. Are employees utilizing services that are easier and faster, whether they are necessary or not? Maybe it involves ordering quickly shipped items from Amazon; whereas in the past, perhaps items weren’t purchased at all or were ordered less frequently.

Focusing in on these small, discretionary expenses and putting policies in place for minimizing their impact on the business can lead to better cash flow over time. Consider if there are places you can still be amenable to customers, but also generate cash flow more quickly. 
 

Access to Funds

Having access to funds during brief ups and downs is crucial. Knowing when you have enough cash on hand helps in the evaluation of your funds:

  1. Do you have three to six months of capital available to cover cash flow shortfalls? 

  2. Is the new sales pipeline full and going to add new expenses?

  3. Is the sales pipeline diminishing and putting pressure on the ability to pay for expenses?

  4. Are your company’s lines of credit enough to meet the potential change scenarios you anticipate over the next 12 months?

  5. Will vendors offer extended terms on seasonal purchases?

Budgeting and Forecasting

Most businesses think about a typical budget, which guides decision-making on multiple fronts. However, it’s also important to review the timing of cash coming in and going out to get a daily, weekly or monthly forecast of your cash flow position and needs. While cash flow may be predictable for some businesses, it’s often only a matter of time until a change occurs that will affect these variables.

These are all important considerations that drive a business’ cash flow analysis and projections whether in a start-up, growth or maintenance phase. Knowing your cash flow and recognizing potential challenges is invaluable when it comes to moving your business forward and adapting quickly to changes as they arise.

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1McKinsey & Company (2019, January). Make Working Capital Work Harder for You.https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/make-working-capital-work-harder-for-you


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