Cash flow is an essential indicator for any business, whether large or small. It is the backbone of its financial success and helps keep the business running smoothly. Optimising it not only increases the company's financial stability but also enhances its ability to achieve growth objectives and maximise profitability.
In this article, we will explore various strategies to optimise cash flow in your business, enabling you to gain greater predictability and control over a company's liquidity.
What is cash flow?
Cash flow, also known as cash flow management, is a financial indicator that shows the amount of money coming in and going out of a business over a certain period of time.
Broadly speaking, it represents a company's liquidity at any given time, which is essential information as it reveals the financial health of the business and its ability to meet payments to suppliers, creditors, and employee payroll, among many other expenses.
Types of cash flow
In reality, there isn’t just one type of cash flow. Essentially, there are three main categories into which this indicator can be classified:
- Operational cash flow: refers to the inflows and outflows of cash from the company's productive activities. The most important are receipts from sales and payments for the purchase of materials needed from suppliers to produce the product.
- Investment cash flow: these are the cash flows related to the purchase or sale of fixed assets, such as the purchase of machinery or buildings, as well as receipts from the sale or amortisation of these assets over time.
- Financing cash flow: arises from financing activities, such as dividend payments to shareholders, cash inflows from the issuance of corporate debt, or share buybacks, among others
Why it’s critical to optimise your cash flow
Cash flow is one of the most important aspects of any business, as it directly affects a company's ability to pay its debts, fulfil its financial obligations, make investments, pay dividends to shareholders, and, ultimately, finance its growth.
In general, when a company does not have healthy cash flow, it may struggle to meet its financial obligations and may need to resort to loans to finance operations, which could ultimately lead the business into insolvency. Additionally, this situation can create a vicious cycle, as more debt results in higher interest costs, which in turn can reduce profitability and put the company’s long-term financial stability at risk.
However, excessively high cash flows are also unhealthy for most businesses. For example, if a company lacks clear investment plans, it could end up accumulating large amounts of cash in its bank account, leading to high opportunity costs and significantly lower returns.
For all these reasons, optimising cash flow, ensuring it is always adequate to meet all business obligations without negatively impacting profitability, is an essential task for corporate treasury departments.
Benefits of optimising your cash flow
Optimising cash flow is fundamental to the financial success of any business, regardless of size. The key benefits of doing so include:
- Improved financial planning: by optimising cash flow, you can gain a better understanding of when payments will be received and when payments need to be made, especially routine ones. This allows for more accurate and efficient financial planning, helping to avoid unpleasant surprises.
- Reduced debt dependence: when cash flow is optimised, the need for external financing, such as bank loans and credit lines, is reduced. In other words, debt dependence is minimised, which in turn contributes to improving the company’s long-term financial performance.
- Increased capacity for new investments: with better cash flow management, opportunities for strategic investments can be identified. For example, a business may decide to invest in new equipment, additional industrial facilities, or expand its product line. With more cash available, these investments can be financed without resorting to debt.
- Enhanced ability to pay suppliers and employees: this is especially important during periods of economic uncertainty, as there may be times when greater liquidity is needed to maintain business continuity.
- Negotiating power: without a doubt, a company with well-managed cash flow has a better negotiating position with suppliers, clients, and lenders.
Solutions for optimising cash flow
Some of the most powerful solutions for optimising your company's cash flow include:
- Excel spreadsheets: one of the most commonly used and versatile tools for conducting any type of financial analysis, including cash flow management. Excel can perform complex calculations, create tables and charts, and automate repetitive tasks. It also includes many templates related to cash flow management, which can be customised to suit a company’s specific needs. However, Excel has certain limitations, especially for large companies handling large volumes of data, multiple currencies, or multiple banks.
- Enterprise Resource Planning (ERP): an integrated business management system that allows for the automation and management of a company’s processes, including finance, purchasing, sales, inventory, production, and human resources. It is an interesting tool for cash flow optimisation because it provides a comprehensive view of the entire business, from inventory monitoring to communication with banks. Like Excel spreadsheets, ERPs sometimes have limitations when it comes to treasury management, so they are not always suitable for all companies.
- Treasury management platforms: focused on optimising cash, such as managing and tracking all of a company’s bank accounts, projecting short- and long-term cash flow, analysing risks, and generating financial reports, among other features.
Tips for optimising your cash flow
Managing cash flow effectively can be a complex task. Some tips to help you achieve this include:
- Timely invoicing and income tracking: any treasurer knows that selling a product or providing a service is pointless if the corresponding payments are not received on time. Therefore, it’s important to issue invoices at the appropriate time to ensure clients pay as they should, while also tracking outstanding payments and sending reminders to late-paying customers.
- Cost reduction: one of the most efficient ways to improve cash flow efficiency is to minimise unnecessary costs in the business, especially those that generate recurring payments. This may include renegotiating contracts with financial institutions, switching to cheaper suppliers, or reducing excessive inventory.
- Improving inventory management: this can help reduce costs and optimise cash flow. Initiatives to achieve this include reducing excess inventory, optimising dead stock, or more efficiently managing merchandise turnover in warehouses.
- Extending the cash conversion cycle: that is, the time from paying for goods from suppliers to receiving payments from customers. This could include offering discounts for early payments or setting shorter payment terms for regular customers.
- Accelerating the cash conversion cycle: refers to the time it takes for a company to convert its inventory investment into cash.
- Planning short- and long-term cash flow: it is important to plan cash flow in both the short and long term to ensure the company has enough cash to cover expenses and fund investments.
- Seeking short-term financing or refinancing: in times of need, short-term financing, such as credit lines or bank loans, can help cover the company’s cash needs and improve cash flow.
How Embat can help optimise your organisation's cash flow
At a time when all business technology is advancing at breakneck speed, treasury management must also adapt to the new economic reality.
To do this, you need the right tools to significantly optimise your company's cash flow.
With features like expense and income tracking, cash flow forecasting, financial process automation, and real-time banking connectivity, Embat can help improve your cash flow management and, consequently, your company’s profitability. Additionally, our platform is user-friendly, intuitive, and customisable, tailored to each business’s specific needs. If you’d like to learn more about our solution, contact us for a demo.
