Improve cash flows with these 10 best practices

Improve cash flows with the 10 best practices below, which will help you to manage cash flows.

Economists, pundits, and others are concerned about inflation, shrinkflation, recession, rising interest rates, and other potential economic impacts arising from polycrisis or other events. These concerns make it even more critical to get a handle on cash flows. Many organizations, large and small, struggle with cash flow management. Finance professionals are using multiple strategies to squeeze more cash out of operations. In the face of rising interest rates, it is better to maximize existing cash flows than to bear financing costs. Some businesses are increasing prices to offset inflationary pressures in their supply chains, but must be careful to avoid falloffs in consumer demand. (See the Wall Street Journal’s Higher Prices Don’t Always Increase Companies’ Profits, October 11, 2022).

CFOs surveyed in a recent Wall Street Journal article, Finance Chiefs Prioritize Cost Savings Amid Inflation, say they have implemented strategies including the following, to manage cash, costs, and profitability:

1. Leaning into pricing to offset inflationary pressures. In a normal environment, typical cost savings efforts would offset inflation; that alone is not feasible in the current economic climate.
2. Redesigning products so that they are more scalable and cheaper, and faster to produce. This approach allows a reduction in initial capital outlays with the option of ramping up to meet higher demand.
3. Reducing costs by finding operational efficiencies and reducing fixed costs.

There are at least 10 groups of best practices that organizations can use to improve cash flows, including the following:

1. Understand what cash flow management means. Cash flow management requires a focus on its constituent elements, which are cash inflows, cash outflows, and, sometimes overlooked, the effective management of cash balances held.
2. Create cash flow management procedures. Create cash flow forecasts and (often overlooked) procedures for assessing and improving the accuracy of cash flow forecasts.
3. Understand that profit is not cash. It is possible to have high profits and no money to fund operations, leading to the organization’s demise. A business could go from loss to profit in one year because of significant reductions in non-cash entries to the profit and loss account. That does not mean that there are any increased cash inflows. Non-cash items may include depreciation, amortization of goodwill, and write-downs of assets or inventories because of impairment.
4. Focus on metrics. Metrics are indicators of what is happening with cash flows. Valuable metrics include the number of days in accounts receivable and cash coverage ratios. (One example of a cash coverage ratio is earnings before interest and taxes plus non-cash expenses, divided by interest expenses).
5. Focus on working capital. Maintain liquidity while keeping working capital at reasonable levels. Working capital is the net of current assets (like cash, inventories, and accounts receivable) and current liabilities (for example, accounts payable, the current portion of long-term loans, and accruals). Finance professionals have various rules of thumb for working capital. One is that the ratio of current assets to current liabilities, or the liquidity ratio, should be at least 2 to be conservative and anything below 1 could be disastrous. However, quantitative measures in isolation can be less than useful. For instance, the liquidity ratio may be 2, but the organization has too much money tied up in inventories or accounts receivable.
6. Improve profitability and revenues.
7. Manage supplier payment terms and accounts payable.
8. Improve billing, credit, and accounts receivable procedures.
9. Reduce or manage the money tied up in inventories.
10. Invest efficiently, maximize excess cash, and ensure that surplus money is not left idle.

Both for-profit and not-for-profit organizations can use the strategies above. For instance, both should create cash forecasts, and both can implement cost-saving measures. Each will face its inherent challenges. For example, depending on the nature of the not-for-profit and its revenue base, the cash situation may be more precarious because donations and other revenue sources are often optional and not predictable. In that environment, forecasts and other cash flow management procedures are even more critical.

The above are the broad strokes of the best practices available to improve cash flows. First Reference’s PolicyPro databases and checklists include numerous specific strategies.

Meeting your duty of care

Improve cash flows using the best practices above. Log in to the Finance and Accountingdatabase in PolicyPro, which includes FN 5.09 – Cash Management, FN 5.05 – Investing Excess Funds, and numerous other policies and tools to help you. Also log in to the Not-for-Profit database in PolicyPro, which includes NP 4.05 – Cash Management and NP 4.07 – Investment Management. Be on the lookout for the updated edition of First Reference’s Cash Management Strategies, which will be released soon. In it, you will find tons of specific actions for the 10 best practices above.

Policies and procedures are essential, but the work required to create and maintain them can seem daunting. The Finance and Accounting, Operations and Marketing, Not-for-Profit, and Information Technology databases in PolicyPro, co-marketed by First Reference and Chartered Professional Accountants Canada (CPA Canada), contain sample policies, procedures, checklists and other tools, plus authoritative commentary to save you time and effort in establishing and updating your internal controls and policies. Not a subscriber? Request free 30–day trials of Finance and Accounting, Not-for-Profit, Operations and Marketing, and Information Technology databases in PolicyPro here.

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Apolone Gentles, JD, CPA,CGA, FCCA, Bsc (Hons)

Apolone Gentles is a CPA, CGA and Ontario lawyer and editor with over 20 years of business experience. Apolone is leveraging 20 years of business and accounting experience to build a commercial litigation practice with an emphasis on construction law. She has held senior leadership roles in non-profit organizations, leading finance, human resources, information technology and facilities teams. She has also held senior roles in audit and assurance services at a “Big Four” audit firm. Apolone has also lectured in Auditing, Economics and Business at post-secondary schools.

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