How to improve cash flow: a strategic guide for CFOs and finance teams
DSO is not a benign metric; it can be lethal. Euronews.com confirms that " one in four bankruptcies in Europe occurs because of late payments" with the annual cost to the European economy of unpaid invoices topping the total GDP of Finland.
Payments in , of course, are just one half of the cashflow picture; managing payments out is just as important. All businesses could tighten up on both to improve cash flow.
Definition: cash flow
Businesses typically break cash flow down into three types:
Operating cash flow: money relating to net income, including revenues and expenses
Financing cash flow: debts, stock sales and repurchases, dividend payments
Investment cash flow: money relating to long-term investments as well as property and assets such as machinery
Check out our free guide to cash flow formulae
Generally businesses seek a positive cash flow situation, where cash inflows exceed cash outflows . A key exception to this preference is with startups. These companies usually plan to endure initial years of negative cash flow and high cash burn, as they spend money to build future growth for their business whilst lacking customers to generate revenues.
Why is cash flow management important?
Let's be clear: no improvement in cash flow is possible without a foundational improvement in the organisation of cash flow.
It's all very well taking actions like:
Selling assets to improve inflows, or
Reducing costs to improve outflows
But unless your business has a central point of cash command and oversight, cash flow will always be a sore point.
Why? Because without reliable intel on the cash situation right now, the reliability of any cash flow forecasts cannot be trusted, let alone guaranteed. And forecasting is the only way in which CFOs can plan cash flow so it stays healthy.
Ways to improve cash flow: attack the big issues
Canny CFOs can tackle poor cash flow immediately by going on the offensive with the basics of cash flow management:
Cash flow pain point | Way to improve cash flow | Benefit |
|---|---|---|
Limited visibility into the cash flow cycle | Sync all sources of information (bank accounts, ERP and your existing tech stack) in real-time to feed a central point of management | Seize opportunities to optimise the use of existing cash (using automated cash pooling among linked business entities, lowering unnecessarily high cash buffers, slashing overdraft fees and getting good rates on short-term investments) |
Using manual AR processes that slow cash flow down | Switch to automated AR architecture you can fine tune. | Get your invoices organised to get paid sooner; the basics are important! Maximise your cash inflow rate whilst managing smooth client relations |
Inaccurate and inflexible cash forecasts | Deploy advanced treasury reconciliation to underpin accurate short-term liquidity projections - and build a long-term cash forecast using only your P&L sheet. Use scenario planning to scope out possibilities. | Plan your strategic cash flow moves over the long-term as well as your short term balancing actions with confidence |
The drill is simple: simplify and enhance cash flow management to build a foundation for cash flow improvements.
How do you improve cash flow in specific types of businesses?
There are two types of cash flow problem that affect businesses to varying degrees across all sectors:
Operational timing issues: these are factors that create a mismatch between inflows and outflows, often caused by sales cycles with extreme variations, tough payment terms and demanding delivery schedules. Manufacturing businesses, for example, often face long production lead times, big upfront material costs and then a long wait for payment.
Financial visibility & control issues: limited accuracy when it comes to cash forecasting as well as hazy management of working capital can lead to unexpected shortfalls as well as inefficient use of surplus cash. Healthcare providers, for example, typically complain of unpredictable and sluggish reimbursements from insurers and institutions (and these are a vital inflow in the sector), leading to desperate DSO levels and no forecasting capability.
A single solution to sector-specific cash flow challenges
The solution to these cash flow problems is getting the right software.
Our experience with over 8,000 clients in various sectors shows time and again that CFOs breathe a sigh of relief when they take the big step to reduce reliance on spreadsheets and, instead, take advantage of the powerful features supplied by dedicated cash flow management software like Agicap.
Developing positive cash flow by sector
Agicap is specifically designed to offer real versatility across sectors in improving cash flow - without the need to buy a custom version to suit your sector, or tweak the standard SaaS implementation.
Here's how:
Sector | Cash flow challenge | Agicap solution |
|---|---|---|
Long payment delays Huge upfront costs Fragmented budgeting | Track cash flow at project level day by day to avoid disaster Use forecasting to plan and mitigate Consolidate multiple construction sites on one dashboard | |
Retail & E-commerce | Seasonal stock levels locks up cash High return rates of products Inconsistent inflows from delayed payouts | Adjust purchasing dynamically thanks to real-time cash and stock forecasting Scenario planning accounts for variations in product returns Connect Agicap to track expected payouts and improve visibility |
Hospitality | Revenue variable depending on seasons and events Daily operating costs unpredictable Manual cash tracking | Use rolling forecasts that adjust to footfall Overcome variations in staffing and food spoilage with centralised dashboards to track daily spend vs. revenue Use location-based cash tracking with automated data aggregation |
Manufacturing | Long production cycles Big upfront spend Complex supplier payment schedules | Deploy long-term forecasts to match production timelines Monitor inventory vs. cash position to mitigate delays Use the Agicap Payment Factory to manage payments |
Healthcare | Delayed reimbursements Complex forecasting across departments Unplanned emergency spending common | Monitor what is expected from insurers and public systems and pin down accurate DSO, day by day Consolidate forecasting across departments - and drill down to individual silos when necessary Deploy dynamic cash buffer alerts and emergency scenario planning |
Agicap clients in further sectors - like real estate , agencies and private equity - continue to find ways to improve cash flow.
Cash flow and investment: an Agicap example
"Thanks to Agicap, we have increased the financial income from our investments by 30% ."
So says N. Atasay of the OCEA Group - one of many Agicap clients who have leveraged the legendary accuracy of Agicap cash flow forecasting to tune up their short-term investment strategy. It's all about having intel you can have the confidence to act on.
OCEA, a French business specialising in energy efficiency, uses Agicap's dedicated conversion module to arrive at a "forecast that is 90% reliable" based on their P&L. And the result is a new freedom in optimising investments.
With Agicap empowering clients to monitor, analyze, and optimize their cash flow in real-time, decisive steps can be taken to improve cash flow by tweaking short-term costs and investments:
Better cash flow analysis allows for finer tuning of series of investments, reaping greater returns
Tackle high overdraft fees with smarter balancing transfers
Do more self-financing rather than take out expensive debt; confident, thanks to better forecasting, that cash shortages will not ensue
Slash banking costs thanks to better monitoring of fees and commissions
To ace your excess cash placement, watch our accessible video masterclass with treasury veteran Simon Jones.
Ready to transform your cash flow management? Book your free demo with one of our experts today and see Agicap in action.
FAQs: solutions to cash flow problems
How do you manage cash flow?
If your business is relying exclusively on spreadsheets to pin down your cash position, you are not well-placed to manage cash flow at all. You need to know where you stand in terms of costs and customer payments right now. Only dedicated software like Agicap, with its real-time ERP and banking syncing, can give you the cash visibility you need.
How can cash flow problems be improved?
Easy wins for businesses lie in embracing three technologies:
Real-time tracking of data from bank accounts, ERPs and software tools
Sturdy cash flow forecasting based on i) above
Scenario planning with custom software that (unlike spreadsheets) makes solutions easy to spot
What is the difference between cash flow and financial flow?
Technically, cash flow is part of wider financial flow:
Cash flow: covers cash items only, with a focus on operational solvency
Financial flow: accounts for cash items plus all other financial movements (like credit, equity and investment activity) with a focus on future growth and finance accounting
