Banking and Finance
Improve your cash flow
How proactive funds management helps you track your money
By Meredyth McKenzie
Smart Business Cincinnati | November 2009
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Jane Zalla, Treasury management sales officer, Fifth Third Bank
Managing your cash flow is critical to helping avoid the extended cash shortages that can be caused by large gaps in your cash inflows and outflows. But it’s a task that many business leaders have difficulty doing, especially in an uncertain economy.
To gain a better handle on your cash flow, consider establishing a proactive funds management process, which may help you avoid the cash shortages that can damage your business or even cause its demise.
“The greatest risk you face is not having the funds to pay your employees and vendors,” says Jane Zalla, treasury management sales officer with Fifth Third Bank.
Smart Business spoke with Zalla about how proactive funds management can help maximize your company’s cash flow and make sure you’re getting the most impact from your cash flow.
How has the economy affected funds management?
A lot of industries are experiencing problems, causing a trickledown effect into other industries. If your vendor or customer base is heavily based in an industry that is experiencing problems, you might run into cash flow problems.
Credit is also a big concern. A lot of companies rely on credit from banks to manage their cash flow and use it as working capital. But the credit standards and restrictions have tightened, making it more difficult to obtain the credit you need to make up for your cash shortages.
How can you help improve your company’s profitability through proactive funds management?
Regularly perform a cash flow analysis and develop a financial forecast. One suggestion is to have a rolling 13-week cash flow forecast, because although it is difficult to predict the future, with proper forecasting and planning, one can help overcome unforeseen disruptions. Even if you’re not directly impacted by something, your vendors and clients could be, and that, in turn, may have an adverse effect on your cash cycle.
One way to protect your company from cash flow shortages is to create a cash reserve. Organizations should typically have a 30-day reserve to cover normal operating expenses. This improves your ability to fund your own business operations instead of having to request credit from a bank.
Another strategy is to shorten your cash flow conversion period. Send invoices out promptly — as soon as the goods or services are delivered — to aid in collecting payment more quickly. You might also consider offering discounts for prompt payment.
Monitor past due accounts and notify customers when bills are late. Consider establishing a deposit policy, in which a portion is paid upfront before goods are provided and the rest is paid after delivery to help improve your receivables process.
