Businesses Can Unlock Value and Manage Risk

Although market conditions may change in the course of time, there is one thing that remains the same for all businesses cash is vital. If cash flow is not optimized companies can earn a profit on paper, but be at risk of being bankrupt when they are unable to pay their expenses.

Small and mid-sized companies are particularly susceptible to irregular cash flow patterns and lack of liquidity, making it essential to pay careful pay attention to the working capital and put procedures in place to handle it before issues–such as a pandemic – arise.

While COVID-19 wasn’t affecting all industries in the same way however, the uncertainty that it created made working capital a top priority on the minds of many business owners. It’s not surprising The study in 2021 by the Federal Reserve study showed that 65percent of small firms had difficulty paying operating costs in the year 2020, while nearly half of them struggled to pay rent or to pay off the debt.

As an interim CFO I’ve witnessed many businesses struggling to establish a sound method to control their money flow. They often look for funding sources outside of their own prior to looking at internal sources and this can be a tempting option to grow a business however, companies don’t always raise enough funds this method.

Just five percent of startups are able to raise venture capital. In addition, applying for loans isn’t a sure choice either. According to a Federal Reserve survey, barely half of US small-sized businesses who applied for financing received the entire amount requested. For more than half small-sized businesses, financing from outside requires personal guarantees to be used as collateral to the credit. In the case of business owners the moment, these debts could be due before the their business recovers.

The initial step is to establish an organized method for cash flow management , and then ensure it’s optimized. It will give enough liquidity to support operations and increase expansion in good times, but also provide security during times of uncertainty, while decreasing or eliminating the need for financing.

A well-structured method is built on three pillars that are essential to its success:

  1. Implement best practices for working capital management.
  2. Create an cash flow forecast and create a system for reviewing.
  3. Participate in scenario planning and plan for both challenges and unexpected windfalls.

Implement Best Practices for Working Capital Management

It is the amount that is diferent between assets in the present and liabilities. It represents the amount of liquidity that can be used by an organization to pay its immediate financial commitments. Before you devise a strategy to control this cycle and increase cash flow, begin by studying and optimizing each of these aspects that include receivables and payables and inventory.


It’s tempting to ease the terms of your payments to attract more customers by offering discounts or allowing customers to pay later because there is no formal procedures for follow-up. There is a compromise between profitability and liquidity: If you allow your customers enough flexibility and allow them to pay late, you could make many sales, but not much cash.

Three important opportunities to maximize your receivables

  1. Align Finance and Sales. The two departments must collaborate to create the right terms for payment that are fair for both the customer as well as the business. Once the policy is established examine the master customer data, look for irregularities, and then reconcile any you find. For instance when the policy says 30-day net, then the customer master data shouldn’t be net for 60 days.
  2. Develop a streamlined billing system that works. Automatization is crucial however, even invoicing that is automated may be flawed or send out in a delayed manner. This may be due to an unorganized approval process, incorrect information, or other mistakes. Make sure you create a lean procedure, establish an internal deadline for sending the invoice, ideally within one day of the signing of the purchase order. Also, identify who owns the master customer information to ensure that there is someone in charge of keeping it up-to-date.
  3. Create a collection strategy. The first step is to make sure it’s easy to monitor the age of your accounts receivables report so that you can see in a glance whether any accounts are in the process of becoming overdue. Then, establish a regular review schedule, such as checking for overdues each week or once a month depending on your company’s requirements. Next, create a procedure and schedule for reminders as well as the subsequent steps to escalate. Additionally, even though it’s the responsibility of the finance department to manage collections, keeping an ongoing relationship with sales personnel will help in a more efficient communication with delinquent customers.


While you can decide your own terms and conditions for accounts receivables, payments will require you to adhere to someone other’s terms. Terms for payment may vary among your suppliers offering both opportunities and problems.

There are 3 excellent ways to maximize your payments:

  1. You can negotiate payment terms in addition to the price. We usually focus upon price, that we fail to think about how the terms of payment can impact the flow of cash. When looking at a prospective vendor, you should always consider negotiation of terms for payment, such as the reduction of advances or agreeing with terms for credit which are compatible the cash flow forecast of your business. This might be challenging for businesses that are newer but as a company expands and its image improves it is a smart idea to revisit the conditions.
  2. Improve your visibility into the data you collect on your purchases. If your procurement-to-pay system isn’t robust enough to supply reliable data to help you forecast your cash flow and forecast, it may be difficult to spot problems and effectively plan. Be sure that your purchase invoices and purchases are swiftly aligned to allow you to determine at a glance whether you’re on the right track to pay your bills or not.
  3. Optimize your payment timing. It is generally recommended to adhere to your set payment schedules to be sure of predictability, but do not completely exclude the possibility of the possibility of making a payment earlier if it’s logical. If you’re planning to make sure that you have excess cash you could consider making a payment advance to companies that offer early payment discounts.


Inventory is typically the biggest expense for businesses. There are many companies that deal with inventory However, if yours does you must keep these three steps in your head:

  1. Set the minimum inventory levels. To avoid the overuse of funds in inventory, strive to keep an inventory sufficient to satisfy fluctuations in demand, but without creating excess. A good first step for a smaller or newly established company is to concentrate on reducing the amount of SKUs. Make sure you only have the most-popular products in stock and then order the rest as required. It could increase the time to delivery for these items, but it will help keep your cash at a minimum for a longer period of time.
  2. Check the patterns of demand. It’s important to know the way your demand fluctuates throughout the week, day, year, and month to ensure you have the best the amount of inventory you have. If you’re struggling to estimate the demand, you should consider locating nearby vendors who are able to deliver faster and allow you to place smaller amounts more frequently than risking discount bulk orders that could be wasted. Based on the products you offer it is possible to purchase your stock in bulk.
  3. You can get a live view. There are numerous software programs which allow you to monitor your inventory. It is important to ensure that your software provides you with a live visual of your inventory as well as the location of it (if relevant) so that you don’t buy too much on accident. If you do not have a software program ensure that there is a procedure in place to either sell or use the most used products first to cut down on consumption.

Create a Cash Flow Forecast and Establish a Discipline for Review

Once you’ve established the foundations of the disciplined management of cash You can begin to track the flow of cash and make plans for the future. A lot of businesses track their cash flow in detail only when they face difficulties with liquidity. However, regular monitoring can allow you to make the most of cash surplus. Automation is extremely beneficial in this case however, if that’s not an choice there are a few practical methods to manage the cash flow manually:

Choose Your Forecast Period and Methodology

A 12-to-18-month forecast is a reasonable general rule of thumb, however it may not be the best fit for your business or industry. When you have established a reasonable period for forecasting, you’ll then be able roll forward when more information becomes available.

The two methods that you can consider when planning your cash forecast according to your timeframe and your needs

  1. Direct method, usually with less than twelve months. It utilizes separate schedules for projected cash out and cash in, using a cash basis projection (rather than an accrual-based basis). This approach is ideal to plan for liquidity in the short term.
  2. Indirect method, usually for longer than 12 month. Cash flow projections are based upon an income statement forecast that is linked to the your balance report DSO (days sold out), DPO (days payables outstanding) as well as DIO (days inventory in hand). This method is less precise than the direct method, and is ideal for planning capital expenditures or allocating capital over the long term.

Focus on Actionable Outputs

Outputs must provide important results for decision-making. The level of detail in forecasts can differ according to your company’s requirements and size, however, it should include three essential components:

  1. Operating cash
  2. Investing cash (capital expenditure or disinvestment)
  3. Financing cash (debt or equity)

Operating cash is your main priority since it will determine the need for financing , or the chance to invest capital into strategies.

The primary objective in the financial forecasting is present useful information, so it must be suitable for its intended purpose. Make your model as easy as it can be. The more complicated it gets more vulnerable to errors and the less valuable the data could become. Keep your inputs in order while processing is simple and your outputs as clear as possible.

Establish a Review Schedule

In normal circumstances, it could be enough to check your cash flow on a monthly basis however when the situation becomes more challenging it is possible to shift to a weekly check to increase the accuracy of your data. Review your forecast against the actual statements and examine the variations to improve the accuracy. The review should be scheduled prior to the payment date of your company to make it possible to control changes to the payment schedule.

Engage in Scenario Planning and Prepare for Challenges and Windfalls

In uncertain times, like the onset of a pandemic, it can be helpful to conduct some scenario planning and identify the steps your company may have to implement to remain on the right track. Determine the best case as well as the medium and the worst-case scenarios. For each scenario, estimate how long the situation will be lasting and what steps are needed to protect your business over the period.

If you’re planning for the more secure times of your life, you are able to test your forecast. Find out what can cause a liquidity issue (such as the hiring of new employees opening a new factory or branch and taking on capital-intensive projects or adjusting for a significant exposure to one customer that is no longer a reliable client) and then define how this might affect your forecast and determine what you can do to reduce the risk.

How to Manage Shortage and Liquidity Crises: Take Control and Buy Time

The liquidity crisis and shortfalls can be caused by external forces (e.g. changes in market conditions) or internal issues (e.g. operating inefficiencies). In both instances the most important step is to buy enough time to tackle the problems within your business or to help you get through until the market conditions improve.

Prior to tackling any operational or strategic changes, you must have as clear an understanding as you can about the amount of time you’ll need to purchase. (As we learned in the case of the pandemic outbreak, some surprises are more difficult to anticipate in comparison to other.) In this time, you should focus on resolving the issue in the short term by focusing on a solution that is compatible with you long-term plans as far as you can.

Take note of immediate actions that could bring in cash and not impact the company, and take as many of them as you are able to. Examples of practical actions include:

  • Reduce non-strategic overheads.
  • The focus is on services and products with more profit margins.
  • Don’t purchase assets, lease them. Sell assets that aren’t strategic and should it be feasible, you can sell as well as leaseback the strategic assets, as well.
  • Prioritize clients with lower risk to increase the likelihood that the payment will be received in time.
  • Make pre-orders on items if you have them on the way.
  • Don’t cut back on costs for areas where they directly impact business performance , even if they do not bring any cash benefits.

The most crucial of all is: communicate to your creditor. Transparency is crucial for acquiring time. If a liquidity crisis occurs it’s normal to shield the information from your vendors to ensure you don’t harm the reputation of your company, however being silent can hurt your reputation even more. In the event of a delay in payments, it is bound to undermine the trust of your vendors. Make sure your vendors are aware of the state of your company, the reason they’re still not getting paid and when they should expect payments based on your plan for crisis.

How to Manage Excess Liquidity: Align Capital to Strategy

While it may be more stress-free managing excess liquidity as compared to a deficit however, it is equally easy to make it wrong. The biggest risk is allocating capital to areas that aren’t strategic for your company or paying shareholders back money prior to evaluating whether you have enough cash available to invest in capital projects that are strategically important first.

The most effective way to make the most of your extra cash can be to

  • Set strategic priorities for your business and allocate the necessary capital to meet these goals.
  • Find strategic ways to use the cash surplus (e.g. paying suppliers in advance in order to receive discount).
  • Find the right amount of money to have in reserve to cushion poor times.
  • Remit any money remaining for shareholders.

Key Takeaways

Establishing a disciplined organization is essential to optimize the flow of cash, improving your ability to withstand the effects of liquidity, and also identifying opportunities that arise when you have excess liquidity. How to do this?

  • Establish the foundations for managing cash flow.
  • Make a plan for planning and reviewing.
  • Purchase time in liquidity crisis to control your cash flow. ensure that you address the immediate issue without jeopardizing your long-term objectives.
  • Align capital with strategy and generate an advantage in the event of windfalls.
Leave a Comment