From supply chain disruption to a dip in product demand to late customer payments, a slowing economy can pose a series of cash flow challenges. To help your company manage the uncertainty, it may help to consider a strategic approach to strengthening your cash position by activating a host of tactics that balance reconfiguring existing agreements with exploring new technologies that streamline operations.
1. Use technology to shorten the invoice collection cycle
As a first step in preparing for cash flow constraints during a downturn, consider adopting a digital-first mindset by modernising your payments infrastructure with invoice software. Invoice software can shave days off the average time it takes to collect payments and can immediately help optimise and improve cash flow.
Automated electronic payment solutions can reduce cumbersome manual processes by generating digital invoices to replace paper cheques with faster electronic payment methods. Many software solutions also come with automated dashboards that provide you with a centralised payment portal, allowing you to consolidate and keep track of all of your invoices in one place.
The benefits of digital software extend to your customers, too – many of these solutions streamline the payment experience making it easier for them to pay by reducing some of the headaches that come with using a manual paper process.
Having a digital servicing solution also automates collecting payments. They can be configured to schedule payment reminders and run reporting as well as set alerts to stay on top of accounts receivable. Invoices go out instantly at deadlines and reminders can be configured to go out as soon as clients are late on a payment which helps to minimise bad debt.
2. Maximise DPOs when possible
The days payable outstanding (DPO) ratio tracks how long it takes your organisation to pay its vendors. By maximizing DPOs and paying closer to invoice deadlines, you can maximise working capital. However, chances are, others are using this strategy during challenging economic times, which means you may end up waiting longer to collect on payments you’re owed. Increasing your own DPOs can help offset this squeeze.
As you consider this strategy, be sure to weigh it against your vendor relationships, especially with firms that are smaller and may be relying on a shorter DPO. While extending your DPOs is generally a good move, you should also think about long term supplier relationships. It is possible to build goodwill by making an exception and paying key suppliers earlier when you can.
Leveraging automated supplier payment solutions such as digital supplier payment tools can help extend or increase your DPO while reducing your vendors' days sales outstanding (DSO) and improving your working capital. By paying your vendors on time through digital supplier payment tools, you can hold on to cash for up to 14 days longer.
3. Negotiate supplier terms
Negotiating supplier terms is more important than ever during times of disruption. Some key areas of focus include:
- Extending payment deadlines: Extending payments can allow you to hold on to cash longer and improve working capital. In the current environment, payments can be a key negotiating factor. If you are in a strong cash position, you can leverage that for greater purchasing opportunities.
- Finding possible rebates: Considering vendors may also be in a hurry to get cash. Would they offer a significant rebate in exchange for faster payment, or to close a deal right now when their sales might be slow?
- Considering volume discounts: You’d need to weigh possible volume discounts against spending more cash upfront, but if your business can afford it, now could be the time to lock in very favourable terms for the future on your needed supplies.
- Comparing vendor terms against industry benchmarks: Be sure to regularly compare your vendors against industry benchmarks to make sure they are still favourable. As economic conditions change, so may standard payment terms.
4. Update cash flow forecasts
Cash flow forecasting can be a helpful tool in predicting your future financial position. But to get accurate results, your models require the most recent data – the assumptions made earlier in the year are now likely inaccurate and you should continue to adjust as the environment continues to change.
Revisit your past cash flow forecasts, or create one with this cash flow forecast template, and see how they've changed based on recent trends so you can adjust your assumptions as needed. One option is to consider forecasting and checking results more frequently – you may get a better picture of your position by updating on a monthly, or even weekly, basis. This may help you catch changes a little earlier so you can more quickly react to changes.
5. Revisit your supply chain strategy
Due to interruptions across the supply chain, you may have already had to change some of your suppliers. This is a good opportunity to think about reevaluating your supply chain from a cash flow perspective. Lower cost vendors tend to ask for larger orders or more money upfront to make up for their price discount. While this may have been a good deal in less disruptive circumstances, there could be benefits to working with vendors who charge a little more per unit but also offer better, extended payment terms or allow smaller orders. Working with local vendors could also avoid supply chain disruptions in international trade due to global economic crises.
6. Foster a cash flow culture
Ask your teams to think more about how to maximise cash flow as a priority when making decisions. Now is a good time to look at everything, from large costs such as inventory and raw materials, to smaller purchases that can quickly add up, such as localised expenses or employee purchasing. Consider providing a framework to encourage your teams to think more about managing cash flows in their day-to-day decisions. This will empower your teams to search for their own ways to maximise cash or save on less-essential business costs, such as travel and entertainment.
