- The need for efficient cash management and strong forecasting practices, especially for mid-market organizations, has grown amid the shifting business landscape.
- Enhanced cash planning, cashflow accountability, leveraging recurring cash inflows, maximizing cash efficiencies, and ensuring timeliness and accuracy of information sources are all key to placing cash at the forefront of an organization’s financial plans.
- Effective cash forecasting is critical to bolstering a company’s financial stability and enhancing overall performance.
The business landscape has experienced a dramatic shift over the last year with a sharp increase in interest rates, which has altered the dynamics of cash accessibility and intensified the importance of efficient cash management. This situation holds particular importance for leveraged, mid-market organizations. Moreover, after a prolonged period of low interest rates and easy access to capital, many businesses now find themselves lacking robust cash management capabilities.
With clients and customers holding onto cash for longer, increasing Days Sales Outstanding (DSO), and vendors enforcing stricter payment terms, accelerating Days Payable Outstanding (DPO), small businesses risk getting caught in the middle and face potential liquidity challenges and cash flow constraints. Now is a crucial time for businesses to recognize the importance of improving their cash management and forecasting practices.
Below are five strategies for putting cash at the forefront of an organization’s financial plans.
1. Enhanced Cash Planning
In a time of high interest rates and economic hardship, firms that appear healthy using the usual metrics—reported revenue, EBITDA, and net profit—may still struggle if they don’t possess the cash to operate. While interest rates are high and debt is costly, not having cash on hand can cripple an otherwise financially healthy organization. Regular and robust cash forecasting enables businesses to establish a close and predictable understanding of their cash position, even if liquidity is not at immediate risk. By targeting predictability and avoiding surprises, businesses can reduce anxiety within cash management and potentially avoid the need to access higher-interest debt. It also allows businesses to identify the material variables within cash management, both in terms of timing and value.
By enhancing its cash planning to prioritize predictability, an organization can minimize risk and better position itself to weather these challenging times unscathed.
2. Accountability for Cashflow
Armed with a clearer understanding of projected cash positions, businesses can proactively manage and improve inflows and control the timing of their expenditures, thus optimizing cash utilization. Through a reliable cash forecast, businesses can avoid unnecessary delays or missed opportunities, ensuring cash outflows are aligned with the business’s most efficient timing.
Clearly identifying accountability for revenue collection, and ensuring billing is both timely and accurate, for example, can remove barriers to prompt settlement down the line. Monitoring DSO and systematically targeting the reasons for lengthening, can reduce the need for cost control. In many service organizations, where individual project or account managers have ownership over client relationships, obtaining predictable inflow can require direct negotiation with a client, and chasing money is a skill many organizations have not needed to build during more favorable economic times.
Similarly, communicating caution and demonstrating oversight over expenditure sends a clear message to the organization that prudence and good judgment are needed and expected. In times of low-interest rates and when loans were abundant, there were potentially few repercussions to inefficient outflows of cash, particularly in high-growth organizations. The ability for individuals to spend without too much oversight was previously a hallmark of a business’s success. Conscious and proactive communication may well be required to change this behavior.
3. Leveraging Recurring Cash Inflows
By achieving predictability in its cash position, a business can also take advantage of opportunities to either accelerate cash inflows, such as negotiating early settlement discounts or reduce costs by utilizing vendor portals for quicker payment processing. This proactive approach can further improve cash flow and in many cases strengthen a business’s relationship with both suppliers and customers.
Predictable income enables an organization to schedule outflows and expenses for the times when cash is available, thus avoiding the necessity of taking on even short-term debt or credit. Retainers and early settlement discounts are some of the tools that can be used to ensure a predictable flow of cash into an organization. Organizations and their clients can determine set payment schedules that ensure that customers can pay consistently and that their cash is on hand for the organization when it is needed to pay its own vendors.
4. Maximizing Cash Efficiencies
To best utilize cash on hand, organizations must also optimize access to it. An organization’s financial situation can include multiple banking relationships, individual accounts, loans, and credit facilities—and more so in highly acquisitive businesses such as private equity. Establishing a clear landscape is the first step to optimization and the ability to focus on a smaller volume more efficiently.
Without it, an organization risks spending high fees and administrative costs. By having a fragmented financial picture, organizations also risk having to shuffle cash reserves around to avoid shortages or to satisfy minimum holding levels.
Within private equity, where the potentially disaggregated nature of individual portfolio companies makes these inefficiencies inevitable, companies should make banking and cash management an essential part of any acquisition integration effort, to ensure that all organizations, including the private equity fund itself, have a full view of available funds.
5. Timeliness and Accuracy of Information Sources
The benefit of cash forecasting is, of course, constrained by access to timely and accurate data. By mapping and understanding available data sources and ensuring their reliability, businesses can mitigate any potential gaps or address delays in information.
Instead of spending precious time and resources on receiving and compiling financial data, organizations should either target automation to release bandwidth for analysis or seek to optimize or consolidate banking relationships where appropriate to reduce consolidation requirements. Analyzing cash flow information quickly and accurately ensures that a business can consistently make the best-informed decisions.
Establishing a close and predictable understanding of its cash position through effective forecasting brings a variety of benefits, especially to small and mid-size businesses, and even when liquidity is not at immediate risk.
As both interest rates and the cost of goods and services increase, the cost of not having a robust cash forecasting strategy increases as well. But the potential value of doing so can add significant value to an organization’s bottom line. For those lacking the expertise or internal resources to perform this critical task, outsourcing can fast-track the identification of problematic areas, bolster financial stability, and enhance overall performance and success. The cost would also be far less than the missed opportunities and mistakes resulting from failing to put a strategy in place at all.