Fifth Third Bank on improving your cash flow

How do you begin doing a cash flow analysis?
First, look at what you’re producing and selling and the costs associated with this. You have to look at your overall business structure, such as how many employees you have to pay, what type of operating facility you have and what the overall expenses are for running your business, from cost of goods sold to delivery.
You also have to look at how long it takes to receive payment on your goods. The goal should be to have this as short as possible. The faster you can get money into your account, the faster your cash flow starts working for you and you can consider either investing overnight or paying down debt. Depending on your business, a typical receivables time frame is 30 days outstanding; however, this will vary depending on the industry and other factors.
Managing the receivables process is critical in forecasting your cash flow. Sending out invoices promptly and managing the collection process will help minimize the gap between the cash inflows and outflows.
The payables process is also important for cash flow. Typically, the goal is to extend out as much as possible while keeping within the agreements of your vendors. Extending your payables allows you to keep the money in your account longer, earning interest and/or possibly paying down debt and saving on the interest expense.
How can you ensure you’re getting more impact from your company’s cash flow?
Having strong cash flow is critical, and it’s always good practice to build up cash reserves for times when cash flow may become an issue. While you’re doing this, you can consider placing the idle balances in short-term options to earn higher interest. Your cash reserves should be liquid to allow for easy access, but you don’t want it just sitting there doing nothing.
It’s always good practice to review options with your banker and consider such items as sweeps or paying down debt, which can be a huge expense that hits your bottom line. You can save the interest expense on the credit side if you pay this down quickly.
Having a positive cash flow also allows you to fund your own endeavors. You can expand, purchase new equipment or facilities, acquire smaller businesses or buy out partners on your own if you have a strong cash flow.
What are the benefits of proactive funds management?
You may earn more income if you manage your funds and cash flow. You get paid on the sales from the goods you produce but have to make sure what you’re selling pays for your expenses.
If you manage your cash flow, you are more likely to have money set aside to earn a higher interest rate or to use to pay down debt. Managing your expenses and cash flow will help put you in a more positive financial position.
Jane Zalla is treasury management sales officer with Fifth Third Bank. Reach her at (513) 534-0245 or [email protected].