Managing your business’s cash flow: 23 tips to stay in the black!

The Covid-19 health crisis gave rise to new awareness among business leaders, at SMEs and multinationals alike. Indeed, 22% of respondents now believe that cash flow management should become companies’ top priority, according to the IFOP survey published in June 2020.

Where do you start? Which levers should you pull? What pitfalls should you avoid? Here are 23 tips for managing your cash flow effectively, so you can finance your company’s growth under the best possible conditions.

#1 Build a cash flow forecast

Managing your cash flow is not something to leave until the last minute. It is therefore essential for business leaders to take a long-term view, so as to anticipate any budgetary difficulties that may arise.

Indeed, drawing up a cash flow forecast makes it possible to spot slow periods early enough to make the right decisions ahead of time.

But beyond the seasonality of cash inflows, the cash flow forecast should also include simulations of the impact of potential exceptional costs and shortfalls, so you are prepared for any eventuality.

#2 Understand your company’s specific characteristics

Many factors, both internal (business model, production chain, financing methods…) and external (economic climate, competition, regulatory environment…), can affect a company’s cash flow. It is therefore essential to have a clear picture of your company’s various exposures in order to better manage its liquidity risk. 

While negative events such as a drop in revenue can affect your cash position, it is worth remembering that positive events, such as sustained company growth, can put you in a difficult spot too if they are not properly anticipated.

#3 Use the right management tools

Companies today mainly rely on two categories of cash flow management tools: spreadsheets and dedicated software.

Managing your cash flow with Microsoft Excel

As the most widely used solution among small and medium-sized businesses so far, the well-known Excel spreadsheet offers a broad range of features for tracking cash flow and building financial projections.

That said, while Excel can handle all sorts of operations and reporting, notably thanks to pivot tables, formulas and VBA macros, some users prefer solutions with a more refined user experience.

Turning to dedicated cash flow software

The visual, intuitive interface of cash flow management software makes it easier not only for users to understand their figures, but also to communicate with colleagues and outside partners (accountants, investors, lenders…).

Real-time visibility into the cash position, the ability to test various financial scenarios, and automatic data synchronisation: this type of software gives decision-makers a 360° view of the company’s economic and financial outlook, while limiting the margin of uncertainty caused by human error.

Increasingly common in dedicated cash flow software, artificial intelligence also supports business leaders in their decision-making through a range of decision-support tools.

#4 Build a monthly budget

Alongside a long-term view of company cash flow, a shorter-term view offers greater flexibility. That’s why building a budget that is updated every month makes it possible to set precise, measurable, time-bound targets.

The more closely the monthly budget reflects the company’s actual situation, the easier it becomes for decision-makers to measure the positive or negative impact of their choices over a given period, and then adjust course accordingly.

The monthly budget thus joins the cash flow forecast as a communication tool for partners and colleagues, so that everyone can easily follow the reasoning behind every inflow and outflow of capital.

Receipts	Disbursements
Revenue incl. VAT	Purchases incl. VAT
Subsidies & capital contributions	Investments & capital reductions
Customer payments	Salaries & social security charges
Financial income	Other operating costs
Tax refunds	Taxes & duties

#5 Set up a complete cash management ecosystem

Several tools can be used to manage a company’s cash flows, at every level. Let’s start with the broadest and work towards the most detailed:

• The cash flow forecast. It provides a long-term overview of the company’s development goals and the constraints to anticipate.

• The cash flow statement. It provides a more visual overview of the cash flows involved in the forecast.

• The financing plan. It provides an overview of the cost structure of a specific project (and how those costs are covered).

• The financing schedule. It provides a more visual overview of a given project’s funding sources (and when they become available).

• The monthly budget. It provides an overview of receipts and disbursements month by month.

#6 Delegate cash flow management

Because cash flow management is not a task to take lightly, it needs regular, dedicated attention. Unfortunately, a manager’s schedule is often overloaded, and even a small distraction can lead to a costly loss of efficiency.

Good to know: A Harvard study published in August 2018 shows that CEOs spend 36% of their time handling urgent, unplanned tasks.

In such a context, the best solution is usually to delegate cash flow management to a dedicated treasurer at larger organisations, or to a trusted employee at smaller ones. In the latter case, however, make sure their own schedule and daily tasks are not, in turn, disrupted by taking on cash flow management.

Please note: Even so, it remains the business leader’s responsibility to regularly check the rigour of their colleague’s work.

#7 Analyse your financial statements closely

Effective cash flow management inevitably requires a detailed understanding of the company’s financial flows, assets and liabilities – which is precisely the role of company accounting!

Where accounting is not handled in-house, working with a good accountant is essential for business leaders, helping them easily identify their main areas of expenditure and set the right economic priorities. Beyond technical expertise, a good accountant should also be able to explain things clearly, giving business leaders an up-to-date, easy-to-understand view of their cash position.

#8 Identify the main sources of waste

One of the keys to good cash flow management is identifying and minimising unnecessary outflows of capital.

Indeed, many expenses can often be reduced, for example:

• Paper consumption and printing costs. Managing documents electronically not only saves money, it also makes documents easier to access.

• Energy waste (lighting, electronic devices, gas). Raising your teams’ awareness of these economic and environmental issues remains the best way to cut costs that build up slowly but surely!

#9 Raise awareness among your teams

Communication with your teams should be as transparent as possible. Only then will everyone truly understand the priorities set by management, the finance department and treasury.

Sharing key indicators, reviewing the company’s current and future economic situation, and being open about the main areas of spending are all good practices to help ensure that you give your decisions meaning.

Because relying solely on a heavy hand to enforce your decisions is simply counterproductive, the priority should instead be to build and maintain a genuine relationship of trust, bringing your concerns and those of your colleagues together.
Please note: This awareness-raising approach goes hand in hand with regular staff training and hands-on work with real-world cases.

#10 Favour variable costs

The two main sources of costs can be split between variable costs and fixed costs. The trouble with the latter is that they don’t depend at all on the company’s performance.
To cope better with slow periods, and provided it doesn’t push up your overall costs, the ideal approach is to convert as many of your fixed costs as possible into variable ones.

#11 Build more flexibility into pay

Salaries and social security charges often grow in step with the company, which can quickly make it harder to keep the agility and room to manoeuvre needed to get through difficult periods.

Bonuses and incentives, a 13th-month payment, or the use of temporary and freelance workers can help business leaders navigate turning points without putting their employees’ pay – and, by extension, the company’s long-term future – at risk.

#12 Keep up regular monitoring

Cash flow management is not a fixed discipline. On the contrary, it calls for keeping a degree of flexibility to deal with unforeseen events that can crop up at any point in the year.

Unpaid invoices, delivery delays, growing stock levels… Optimism leads us to hope everything will go as planned, but let’s be realistic: that is rarely the case.

It is sometimes necessary to push back certain non-essential expenses to keep your cash flow balanced. Regular monitoring makes it possible to spot the unexpected early enough and manage it better, by prioritising areas of spending. Postponing certain purchases can, in this way, help you stay afloat when things go wrong.

#13 Anticipate slow periods

Although unforeseen events are, by definition, unpredictable, it remains important to prepare for them as best you can. To do this, long-term modelling of annual cash flows is a major asset for staying ahead of the difficult periods of the year.

Fixed costs, seasonality, underlying trends… Business leaders need to be aware of the main factors affecting cash flow, and to know about them early.

As a result, the main pressure points in cash flow management can be identified in advance and resolved more easily: adjusting your business model or carrying out a capital increase, for example, could give the company more of a cushion should the need arise.

#14 Negotiate with your bank

Even with the best will in the world, there can be periods when everything seems to be going wrong at once. To avoid a cash crunch, it is sometimes better to prepare for the worst and negotiate an overdraft facility with your bank.

However, since trust is obviously central to securing favourable terms, it is best to make this request during a period of strong growth for your company.

That way, you will benefit from better rates and a higher ceiling, and will cope more easily with periods of crisis, provided these stay brief and exceptional.

#15 Build up a safety cushion

Requesting an overdraft is never straightforward, which is why it’s always worth setting aside a percentage of your profits, so you can stay self-sufficient when your business hits a rough patch.

Gradually building up a safety cushion will, for example, help you smooth out the budget curve in your cash flow management, and make it easier to deal with the worst unforeseen events (natural disaster, burglary, economic crisis…). This approach also makes it easier to keep the natural rhythm between phases of expansion and phases of consolidation.

#16 Understand your working capital requirement

The other side of cash flow management isn’t about cutting costs, but rather about optimising your income. Although this may sound “easier said than done” at first, keep in mind that cash flow is calculated using the following formula:

Cash flow = Working capital − Working capital requirement

Working capital – that is, resources available on a lasting basis – flows directly from every conceivable source of liquidity.

#17 Increase your revenue

As a business leader, it’s easy to lose yourself among a thousand objectives and, buried in the day-to-day, forget some of the founding principles behind a company’s profitability.

This is particularly true of the Pareto principle (also known as the 80/20 rule), which holds that 20% of your customers generate 80% of your revenue. While this statistical rule shouldn’t necessarily be applied literally to running a business, it can be worth taking a step back to review the state of your client portfolio.

You may then be surprised to find that the bulk of your human, time and financial resources goes towards chasing late payers, negotiating with demanding clients, or handling small orders.

Depending on how scarce your offering is (and thus how intense the competition), you may be able to plan a slow but steady increase in your pricing, while focusing your efforts on retaining your most profitable customers. Promotion, advice and availability are then the watchwords for reaching your goals.

More broadly, studying your market should lead to a clear, precise definition of your typical customer. This makes it easier to target your audience effectively through the most relevant communication channels.

Whether it’s digital communication (relevant social networks, whitepapers, newsletters, blog…), print advertising (flyers, banners…) or attending trade shows and conferences, it’s essential to carry out a close analysis of the return on investment (ROI) of your actions in order to optimise your profitability.

Depending on the product or service being sold, it may make more sense to focus on regular push publications (going out to reach your audience) or pull publications (attracting your audience to you), always with the aim of delivering real added value.

Planning promotional offers to attract customers during slow periods, for instance, is one of the good practices used to offset revenue seasonality.

#18 Analyse and innovate

Regularly questioning your business model makes it possible to innovate, not only in your offering, but more broadly across your entire production chain.

Several sources of inspiration can spark this kind of thinking, namely:

• competitive intelligence to stay ahead of the curve;
• market analysis to stay close to your target audience;
• customer feedback to optimise your satisfaction rate;
• employee feedback to boost your productivity.

Good to know : Traditional methods such as customer satisfaction surveys or employee suggestion boxes remain an excellent way of gathering constructive input!

#19 Keep your balance

One common mistake among entrepreneurs is to swear by revenue alone. Selling a lot is good, but what really matters is holding on to a healthy margin within a pattern of regular orders.
Stable, steady growth will always be worth more than a string of small, scattered orders, or an occasional large one. The ideal is to keep your balance, so as to smooth out your cash flow curve.

What’s more, if part of your transactions are denominated in foreign currencies, you may need to put a hedging strategy in place to protect yourself against currency risk and preserve your margins.

#20 Stay on top of client payment terms

One of the main constraints of cash flow management is not always holding all the cards needed to optimise it, particularly when your clients delay their payments. Making sure your partners pay on time therefore calls for prompt invoicing, with clearly stated, precise payment terms. 

Please note: Payment terms of more than a month should be reserved exclusively for your most loyal customers!
While late payment penalties and formal notices remain an option, it’s best to do everything you can to avoid resorting to them: to that end, it’s wise to set a clear, systematic follow-up policy, so as to lose as little time – and patience – as possible.

#21 Select the right customers

To guard against your cash flow being undermined by unpaid invoices, the best approach is still to choose the right customers from the outset. Not everyone has that luxury, but as a company matures, this kind of selection often becomes possible sooner or later.

To work out what your “customer filters” will be, you first need a clear understanding of your offering, your values, and who they are aimed at.

The more successful your business model, the easier it becomes to set your own rules of the game, for example by:

• shortening the payment terms you allow;
• reducing the room for negotiation on pricing;
• narrowing the range of your offering to focus solely on the most profitable options.

#22 Encourage cash payment

While setting barriers to entry cuts down on unpleasant surprises in your business relationships, you should also back up your invoicing policy with incentive measures.

Anyone hoping for prompt payment needs to put the right measures in place: offering online payment, diversifying payment methods, rewarding the most punctual customers with discounts… Every means is worth using to give your partners a reason to indirectly contribute to the good health of your cash flow!

#23 Improve collaboration with suppliers

Expecting impeccable behaviour from your partners also means, in return, keeping your own house in order. For the sake of your image, but also to secure more favourable terms, it’s essential to maintain an open, honest dialogue with your suppliers and to honour your commitments.

Good to know : Setting reminders at fixed dates and times in your electronic calendar can help you avoid many oversights or late payments.

Alongside this discipline, it can be worth regularly renegotiating prices with your suppliers while carrying out a competitive analysis, to strengthen your case…

For companies involved in international transactions, cash flow management is quickly complicated by exchange rate fluctuations. To help you manage your cash flow more effectively, b-sharpe lets you settle your invoices in foreign currencies with complete ease!