Cash is still king. In 2008 and 2009, many companies failed because of a lack of liquidity, and as the economy declined and sales trended south, many saw their accounts receivable days lengthen out. Combined with overleveraged balance sheets, it resulted in the tragic end of many companies.

“Cash flow is the lifeblood of any company, and managing it is the key to a company’s longevity,” says Edward L. Wood, CTP, regional vice president of commercial lending for National Bank and Trust.

Smart Business spoke with Wood about cash flow management strategies that can prevent companies from becoming overleveraged.

What are the areas of cash flow that a company can control?

The key component to managing cash flow is managing the inflow and outflow of money. A company needs to focus on three areas: accounts receivable, inventory levels and accounts payable. You want to shrink your turnaround days as much as you can for your accounts receivable and inventory levels. The shorter the turnaround on your receivables, the quicker you are collecting cash and putting it back into the company.

For payables, an outbound form of money, the strategy is the opposite. If you are paying your vendors in 10 days, you want to lengthen those payment periods to 30 days. This creates cash in the company because you are slowing down the outbound flow of money from the company.

Every industry varies somewhat on its payables strategy. Have a discussion with your lending officer because he or she can give you a benchmark of your payment strategies compared to your peers to give you an indication of where you should be. But generally, getting your payables out in 30 to 35 days is not unreasonable.

On the inbound side, you need to keep your receivables at the same levels. Less time is better on the inbound side and more time is better on the outbound side.

How should cash flow be tracked?

The main issue is that it needs to be a process that is focused on consistently, not just at the end of each quarter. You need to manage your accounts receivables turn, inventory turn and payables on a consistent, daily basis to know where they are. That is information you can get by using accounting software, or your community bank can take your financials and give you benchmarks.

What are some common cash flow management mistakes?

Particularly on the inventory side, and especially for manufacturing companies, you have to be careful of the inventory you are purchasing and how quickly you turn it around. Buying an expensive piece of inventory and not selling it quickly can tie up cash flow. It is important to buy inventory that you know will have a quick turnaround, not something you have to sit on while you look for a buyer.

On the accounts receivable side, the mistake is not monitoring your how quickly your receivables are turning over. When you make a sale, the faster you collect on your receivables, the faster you put cash on your balance sheet. Making a sale doesn’t do anything for your company until you are paid.

Customers need to focus in on methods that make receiving payments faster. To encourage faster payment, you can increase the cost for transaction types that are slower or offer discounts for faster methods.

On the outbound side with accounts payable, you can have a conversation with your customers about when they should expect to be paid. Vendors will often work with you, which will help to better manage your cash flow.

How can a company improve its cash flow?

Depending on your lender, it is always a good idea to make sure you are using cash flow effectively.  If you have a commercial line of credit, consider a loan sweep that allows you to automatically apply your excess cash against your loan. If you need money, it automatically pulls liquidity from your line of credit so you are not manually moving money back and forth between your loan and deposit account. A lot of financial institutions will charge significant fees for those, but if your bank is doing so, you need to find a bank that is not.

You can also look at your billing cycle in terms of when you are sending out invoices. If you are not offering discounts on accounts receivable, doing so can be an incentive to get paid quicker.

How do you determine what impact capital assets will have on cash flow?

With purchase of any capital asset, the company needs to look at the value it brings to the bottom line. When you buy a piece of equipment, it produces some benefit over time, which is where financing becomes attractive.  If you pay for the equipment in total today, you are putting all of that cash into a physical asset that offers a return over several years. Financing defers the payment of the asset over time to match the revenue coming in from the asset to its debt payments, so you are leveling off the payment structure to match revenue generation.

What products can a bank offer to help improve a company’s cash flow?

Utilizing electronic deposit for deposit transactions is a big plus rather than taking deposits to your bank. You can do this from your office through a check scanner, allowing you to accelerate the collection process, and this lets you know more quickly if you have a problem with a payer.

A lock box is another option. It eliminates the option of having something mailed to company and the need for someone to physically make the deposit. It also accelerates collections.

Edward L. Wood, CTP, is regional vice president of commercial lending and the HCDC (Hamilton County Development Corp.) 2011 lender of the year. Reach him at (800) 837-3011 or ewood@nbtdirect.com.

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