How to Help Optimize Cash Flow During a Changing Financial Climate.

From supply chain disruption to a dip in product demand to late customer payments, economic downturns 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 modernizing your payments infrastructure with invoice software. Invoice software can shave days off the average time it takes to collect payments and can immediately help optimize cash flow. Automated electronic payment solutions can reduce cumbersome manual processes by generating digital invoices to replace paper checks with faster electronic payment methods. Many software solutions also come with automated dashboards that provide you with a centralized 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 minimize bad debt.

2. Maximize DPOs when possible.

The days payable outstanding (DPO) ratio tracks how long it takes your organization to pay its vendors. By maximizing DPOs and paying closer to invoice deadlines, you can maximize 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 good will by making an exception and paying key suppliers earlier when you can.

Leveraging automated supplier payment solutions like 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 up front, but if your organization can afford it, now could be the time to lock in very favorable 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 favorable. 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 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 cash-flow swings.

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 up front 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.

Leveraging automated supplier payment solutions like digital supplier payment tools can help extend or increase your days payable outstanding (DPO) while reducing your vendors days sales outstanding (DSO) and improve your working capital.

6. Foster a cash-flow culture.

Ask your teams to think more about how to maximize cash flow as a priority when making decisions. It’s likely that multiple areas of your organization have been disrupted, so now is a good time to look at everything from large costs like inventory and raw materials to smaller purchases that can quickly add up such as localized 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 maximize cash or reposition spending away from less-essential areas like T&E.

Companies that optimize cash flow now may be able to help position their organization to manage disruptions that are happening now or in the future. Leveraging technology, such as automated payments solutions, may not only help to improve cash flow but also may allow finance teams to focus on strategic projects, better positioning them to expand when the economy starts to pick up in the future.

Photo: American Express

A version of this article was originally published on June 10, 2020.

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