In times of growth, many businesses that are flush with cash may spend and expand freely without a plan for the unpredictable. Once cash runs out or a downturn takes place, these businesses lack the ability to adapt quickly and recover. Organizations with flexible—and disciplined—cash flow management are the ones that remain cash flow positive and stay ready for the challenges ahead. 

Don’t wait for challenges to occur. Build a strategy that looks ahead. Learn how to create a liquidity risk strategy and improve cash flow management in 10 steps. 


Cash Flow Management: Questions to Ask Your Business

Becoming and remaining cash flow positive is necessary to maintain a healthy business. When and if more funds are eventually needed, a positive, stable cash flow management will help secure the next loan or investment.

How to improve cash flow?

Paro fractional CFO Brooke S. recommends that businesses assess their vulnerabilities and adopt a systematic approach to address liquidity risk. That includes analyzing cash flow forecasts and other business reports with an eye toward optimizing processes and minimizing costs.
When building robust cash management strategies, be sure to have answers to the following questions: 

How well do you know your business?

All goals and objectives of an organization should be in alignment with its strategic vision.

“Strategic vision is the anchor that guides you. Make sure projections and forecasts together support where the CEO is going,” Brooke advises.

Understanding the organization’s ecosystem—its products, industry, competitors, vendors and customers—can also help make informed decisions that are necessary throughout its lifecycle.

How frequently should you create cash flow forecasts?

The cadence of your cash flow forecasts should be dictated by the rhythm of your transactions and the needs of your organization. Higher transaction volumes, large receivable or payable accounts and seasonal fluctuations demand that cash flows be monitored more closely. Weekly review, in this case, is expected.

A CEO’s leadership style and risk profile can determine a more formal cash flow forecasting schedule. CEOs with a higher risk tolerance may rely on the finance team’s expertise to monitor activity and identify concerns. CEOs with lower risk tolerance may personally want to have their thumb on the pulse of cash flow activity. This signals more frequent cash flow forecasts. 

Do you know your best and worst case scenarios?

In addition to cash flow forecasting, Brooke also employs scenario analysis. These scenario analyses take negative assumptions, such as losing a significant amount of business or increased expenses, to model the best, medium and worst case scenarios for the business.  

“In taking the extremes to model out the worst case scenario and then dialing that back for medium and best case, the CEO and decision makers have some sort of banded decision-making of what they can look at depending on where they fall, like impact or how aggressive or conservative they want to be in their approach,” states Brooke.

Do you have a cash reserve?

Building a cash reserve can provide additional flexibility to allow a business to seize opportunities. When a coveted location becomes available and requires an immediate deposit, having the funds to make the deal happen can secure the spot much faster than waiting for loan approval.

Set aside a portion of fundraising monies or build a cash reserve through disciplined monthly deposits into an account or investment. 

Is your financial reporting focused and relevant?

For both new and existing reports, Brooke recommends asking four key questions when reviewing each financial or operational report:

  • What is the purpose of the report?
  • Can anyone reading it immediately understand the story behind it?
  • Is it going to provide actionable information?
  • Is the effort to create the report worth it?

The answers will point you to determining its relevance and help identify gaps that can make the report more useful to its readers. It is also essential to identify and fix inaccurate or incomplete data and spend time to eliminate irrelevant information to ensure the focus is on key business drivers. 

How can KPIs help during volatility? 

KPIs (key performance indicators) also offer quick insights into the state of a business. But the number of KPIs that companies can track can be overwhelming. Prioritize reporting those that enhance performance and cash flow to focus on actionable information that is helpful to decision making. 

KPIs that will likely be high on the priority list:

  • Days Sales Outstanding (DSO) – monitor accounts receivable collection 
  • AR to Sales Ratio – the percentage of your sales that are billed
  • Cash to Debt Coverage (CDC) – the organization’s liquidity based on its ability to cover debt with current revenue

Do supplier relationships matter?

Building and maintaining strong relationships with suppliers can keep you top-of-mind when supply chain disruptions force difficult decisions. Keep an ongoing list of backup suppliers should you need to substitute stock if your preferred supplier does not have what you need available.

“I have one business that I’m working with where they’ve [maintained good relationships], and because of that, now that we’re in a supply chain crunch, their needs are prioritized because they’ve maintained those relationships with their suppliers,” states Brooke.

Are you renegotiating contracts?

Are you getting the most for your money? Revisit existing contracts periodically and renegotiate them if the terms are not optimal for your organization. When you have shown to make reliable payments or have increased the amount of business with a supplier, they are more likely to offer volume discounts or flexible payment terms.

For long-term contracts, it’s also important to consider the implications of being tied into those contracts in the event of future challenges. Evaluate terms and renegotiate where possible so that you’re tied into your contracts for shorter periods of time. In addition, build your relationships with lenders to secure the most favorable terms as part of your liquidity risk strategy.

Do you hire the right talent only when you need it?

“Make sure that you’re thoughtful and strategic about hiring the right people at the right time. Making sure that you have a long-term vision for the talent that you hire is important. [Don’t hire] a full-time person if you can really mix and match full-time talent with the more remote options,” states Brooke. 

Spending on talent can greatly impact cash flow, particularly in the technology and service sectors. While some business leaders remain steadfast in their preference for on-site employees, others leaders have seen substantial benefits by integrating their full-time talent with remote talent pools. Building a flexible workforce offers greater longevity and the flexibility to scale or move as needed. 

Flexible talent models can provide specific skills without investing in a costly recruiting cycle or committing to full-time hours. This structure can provide both cost savings, immediate impact with talent that may not be available in your immediate area.

Do you have the right technology?

Over or under spending on technology impacts a company’s ability to function optimally. Improving processes, creating operational efficiencies and supporting flexible, hybrid environments can be enhanced by technology. 

When considering investing in automation or integrating new reports, one best practice is to create a proof-of-concept with your existing resources to ensure that the result is beneficial and worth investment. Also, take steps to ensure that your data is clean, complete, and accurate before using it in a new process or migrating it to a new system.

“All of these technologies reporting cash have to be connected in a meaningful way to the business of the organization, or you’re just going to have a bunch of tools that don’t move the organization along and help it make the changes that it needs,” states Brooke.

Is your budgeting disciplined?

Developing and maintaining good financial habits is key to staying cash flow positive. Control spending in times of growth—not only when finances are tight. 

Document SOPs (standard operating procedures) if you do not already have them, and include steps like recording receipt images for expenditures that meet certain thresholds.

Achieve and stay cash flow positive in any market

Businesses that are flexible and responsive to economic conditions will be the ones that thrive in times of adversity.

Close monitoring and careful fine tuning of your liquidity risk framework will help your company survive a volatile market. Liquidity risk shortfalls can be addressed and mitigated through regular cash flow forecasting, capital management and strong relationships with lenders.

Paro offers cash management strategies to give your business the agility to grow. Improve your cash flow with access to an elite community of finance experts that can help you understand your business, create cash flow forecasts and protect your business health.