Cash Flow Improvement: Leaving No Stone Unturned
The pandemic has strained many businesses, and cash flow for many has gotten tighter. It is even more important now to leave no stone unturned to improve liquidity. With a conscientious and thorough review, it is very possible to find and take measures to conserve cash and reduce expenses to improve liquidity. Many times, the actions required are not even drastic.
Over the years, I have found that improving liquidity is best obtained by reviewing current outflows and examining the balance sheet. This analysis will help you to really understand your current liquidity, and to make changes to improve your cash position.
Measures to Conserve Cash
Review All Outflows: First, review the current check run, the ACH’s and other drafts from your checking account. Are all these expenses necessary in today’s pandemic? Are all these expenses necessary to keep the business viable? Make sure you have all the bank accounts and credit cards reviewed at least one month to analyze an entire cycle. This exercise can be stressful. If you include your staff and do it in a relaxing manner, you may be surprised at what you learn.
Review Accounts Receivable (“AR”): AR are only one degree removed from being cash. The longer it takes to collect means higher borrowings and stretched vendors. Questions / concepts to consider:
o Is everyone paying close to terms? Is everyone complying with the credit limits you set for them?
o Have you checked recently on your customers’ financial health? Do you have a large invoice that has not been paid because the customer is waiting for a small credit to be issued? The review of accounts receivable will uncover any sales, shipping or product issue that may be causing delays or deductions to collection.
Review Inventory: The cash outlay for inventory is possibly the largest outlay right after payroll. Improving inventory turns represents improved cash flow! Questions / concepts to consider:
o Does the inventory on hand correlate to the sales and the backlog? If you have excess inventory, investigate why. Depending on the reason, you may need to adjust future purchases. Do not just keep buying because that is what we did in the past.
o Do you have old inventory or work in progress? Perhaps you can sell some at a reduced price or complete the WIP and sell it as finished goods. Your team can tell you which customers may take extra product.
o The principle of Just-in-Time inventory should be reviewed and managed tightly. Excess inventory represents tied-up cash.
Review of Capital Expenditures: Delay capital expenditures but not preventative maintenance
Review of Other Assets: Investigate if your intellectual property can be monetized via royalties or other methods.
Summary
Improving cash flow requires understanding your finances and operations. The above review is not a one-time exercise. It is paramount to measure progress. Maintaining a 13-week forecast and measuring against it weekly is a great exercise to gauge progress.
Surviving during these challenging times requires leaving no stone unturned to improve cash flow!
