Climbing interest rates and inflation, paired with continued supply chain issues and geopolitical tensions, have increased the challenges midsize businesses are facing. Still, mid-market leaders are cautiously optimistic about their companies’ outlook for 2022, according to KeyBank’s recent Middle Market Business Sentiment Report.
To improve your own outlook, optimize your cash flow with these 5 essential steps.
1. Keep business expenses at a minimum
Small charges can add up quickly when you’re minding every penny. Cutting back on unnecessary expenses is the first step toward better cash flow.
Start by auditing operating costs to identify areas for improvement:
Do you understand all your recurring expenses?
Are the prices you’re paying reasonable?
Are there less expensive alternatives?
Are there recorded payments for expenses that never occurred?
Are there any missing transactions?
Is everything recorded at the correct amounts?
Are the terms and conditions of existing contracts clear?
What can be altered without penalties to save money?
With those improvements in place, look to the future and focus on proactive spend management.
For example, you might look for suppliers with better prices or consider moving to a smaller office now that many people are working from home. Negotiation—with landlords, vendors, and others—can go a long way when you’re trying to reduce recurring expenses.
Take a hard look at discretionary spending too. Be honest about what’s merely nice to have as opposed to an absolute necessity.
It may be uncomfortable at first, but saying goodbye to those non-essential items will quickly free up cash. And even essential purchases should have approval limits to keep a tight grip on spending.
2. Proactively manage receivables and payables
Understanding the rhythm of weekly or monthly cash inflows and outflows can help you manage payment traffic.
Start by auditing your AR to get a better sense of when you can expect payments from each customer. Some may be diligent about submitting payments ahead of the due date, while others might have a history of late payments. Being able to pinpoint when cash will come through the door lets you schedule payments strategically and manage cash flow balances.
To manage unpaid invoices, work with clients to create realistic payment plans that help make cash inflows more predictable.
When it comes to your own payables, practice the same diligence you’d expect from customers. Be up-front and transparent about your payment plans to maintain vendor relationships. If you anticipate making a late payment or needing an extension, communicate that information as early as possible. It will help everyone plan ahead.
Another payables strategy is to determine which suppliers will charge penalties or late fees, then prioritize making those payments first. Even small fees can add up over time. Take advantage of early payment discounts as well to make incremental improvements to your cash flow position.
3. Get paid faster by accepting electronic or Automated Clearing House (ACH) payments
Paper checks are rapidly becoming a thing of the past as organizations realize the benefits of digital. Rather than waiting for checks to arrive in the mail (if they do at all), use electronic transfers to receive and process cash faster.
Additionally, collecting digital payments makes tracking invoices and maintaining audit trails much easier. Going digital guarantees that you have a record of exactly which payments were made and when.
This kind of real-time visibility is almost impossible with paper checks, which require manual entry into accounting systems. Accepting electronic or ACH payments gives you combined security and oversight.
4. Automate your AP and AR processes
Even if you already use digital accounting systems, it pays to take them one step further with automation. AP and AR processes can be automated to minimize mistakes while maximizing efficiency.
Automation provides an easy way to keep track of payments and receivables, especially when cash flow becomes a concern. A solution like Bill.com can help you get paid on time and optimize your own payment schedule.
Automated AP also improves invoice timing by delaying payments until they’re due, which allows for more flexible cash flow. Those extra few days can help you avoid taking on additional short-term debt.
All told, automated tools provide better visibility into your company’s balance sheet, enabling you to improve cash flow management. Automation-enabled AP and AR platforms give finance teams a detailed view of their company’s day-to-day transactions in a single location that doesn’t require manual data entry and upkeep.
With the time saved by automating bill pay and collections, your team can focus on more strategic tasks and initiatives.
5. Use credit wisely
Just like your personal credit cards, business credit card balances should be paid on time and in full each month. This helps keep debt under control, build credit, and avoid interest expenses.
Don’t let the ease of charging items to a credit card fool you—repaying the debt may prove more challenging at the end of the month. If needed, use your line of credit as a bridge until client payments arrive, then pay down the credit as soon as possible to keep borrowing costs at a minimum.
Ideally, business credit should be less about credit and more about accountability, better budgeting, and greater visibility into company and employee spend. A spend and expense management system like Divvy, for example, lets you set up customized spending limits for each employee or department while automating your expense report process.
This creates a simple overview of who is spending how much and on what. Built-in budgeting and forecasting tools can help you identify where money should be spent and where you can cut back.
Successful cash flow management
Ongoing economic and geopolitical headwinds will undoubtedly present new financial challenges for midsize companies. Future-proofing a business will mean learning how to wisely manage your cash flow instead of waiting for trouble to strike.
Using solutions like Bill.com’s AI-enabled AP and AR automation as well as Divvy’s spend and expense management can give you better visibility into your payments, receivables, and business spend , helping you better manage your cash flow in uncertain times.
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