This article originally appeared in the August 2024 issue of Security Business magazine. Don’t forget to mention Security Business magazine on LinkedIn and @SecBusinessMag on Twitter if you share it.
Depending on the verticals you operate in or the part of the country you find yourself in, you may be concerned about how to prepare for challenging times. Where to invest, where to cut, what to focus on – these are all pressing questions.
While helping a company maximize cash flow can be overwhelming, there are a few simple strategies a business can employ. Here are six best practices:
1. Manage receivables.
Good cash flow begins with customers paying you. If they are not paying on time, then almost every other strategy will not work. Among complicated metrics, the percentage of invoices past due greater than 30 days is the most telling. If any customer has more than 20% of their balance due more than 30 days, their problems likely go beyond normal disputes and business activities – they are likely in trouble. Further extending them credit will likely come back to bite you.
Monitor these customers closely. If cutting off the customer is not an option, consider collecting a deposit or something similar until the situation stabilizes.
2. Pay attention to payment terms.
Many vendors will offer discounts. If you are looking to maximize cash flow, give preference to vendors who offer longer terms or better discounts (when possible), and be sure to secure every incentive they have to offer. While payment in 30 days may have been acceptable in the past, there are better options available today.
3. Minimize inventory.
If you have inventory that you don’t need or need rarely, don’t keep it. Every item in your inventory requires effort (in the form of valuable labor) to maintain, move, count, etc. Avoid buying inventory that sits around, but if it happens, convert that excess inventory to cash by selling it.
4. Manage work in process.
If you let your open, unbilled jobs get out of control, it will not be a pleasant experience. Have regular touchpoints with your team to make sure every invoice is being billed to your customer as early as possible. Try to keep the interactions brief, but do not skip them altogether.
5. Monitor administrative costs.
Keep an eye on non-revenue producing costs (overhead). You need these to support your business, but too much will not bring value. Track overhead costs as a percentage of revenue and make sure the ratio is always improving. If you cannot track overhead ratio, simply track how much revenue you have for every employee. If the revenue per employee is not growing, you are probably over-investing.
6. Invest in equipment and software carefully.
It is easy to get into a cash crunch by over-investing in equipment and software. As a good rule of thumb, capital spending should be roughly equal to depreciation each year. If you are investing faster, there will be a lot of pressure to grow much faster than your historical growth rates.
While managing your cash flow is complicated, and the specifics of every business will vary, the more you simplify, the easier it will be to manage your cash flow – especially in challenging times.
