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Overcoming Common Cash Management Issues: A Guide for Cash Managers

cash management and cash reports

Cash management is a critical function within any business.  Cash managers are responsible for ensuring optimal liquidity, financial stability, and growth opportunities.  However, cash managers often encounter significant challenges that can impede effective cash management and forecasting.

Left unchecked, cash flow issues can result in business failure.  Even profitable companies can face financial difficulties if they lack sufficient cash reserves or fail to manage their cash flow effectively.

This article explores some of the most common cash management issues and how to overcome them.

The rising importance of cash management

Cash management and cash forecasting have always been crucial for businesses.  But their importance has become even more pronounced in recent times due to several factors:

  • Economic volatility.  The business landscape has become increasingly volatile and unpredictable.  Business disruptions, geopolitical issues, and economic turbulence can have a significant impact on a company’s cash flow.  Effective cash management allows businesses to navigate these challenges and maintain financial stability during uncertain times.
  • Increasing competition.  Globalization and technological advancements have intensified competition across industries.  Digital-born competitors have turned some industries on their proverbial head.  To fend off disruptive new competitors, businesses must optimize their cash flow to invest in product innovation, geographic expansion, marketing, and talent acquisition.
  • Ever-increasing customer expectations.  Customer demands and preferences are always evolving.  Effective cash management provides the funds that businesses need to invest in research and development, product/service improvements, and customer-centric initiatives.
  • Access to financing.  Borrowing can be an essential tool for growth.  But rising interest rates and tighter lending standards have made it harder for businesses to access to the capital that they need at affordable rates.  Strong cash management demonstrates fiscal responsibility and enhances the business’s creditworthiness, increasing the likelihood of securing financing when needed.  Effective cash management can also reduce the need for costly borrowing.
  • Sustainability and long-term growth.  More businesses recognize the importance of sustainable growth and financial resilience.  Investors also scrutinize a company’s prospects for long-term growth.  Effective cash management allows companies to allocate funds for investment in long-term growth initiatives and responsible business operations.

These are some of the cash flow challenges of today’s complex and dynamic business environment. 

Signs it’s time to improve your cash management

Keeping pace with cash flow challenges is easier said than done for many businesses. 

There are several signs that it may be time to improve your cash management practices. 

  • Cash flow issues.  Does your business consistently have trouble paying bills on time or meeting financial obligations?  If so, better cash management may be needed.
  • Insufficient working capital.  If your business frequently finds itself short on working capital to cover day-to-day expenses, it may be a sign of poor cash management.  A lack of working capital can lead to missed growth opportunities and a reliance on costly financing.
  • Poor cash forecasting.  If your business struggles to accurately predict its future cash flow, your cash management practices may be to blame.  Inaccurate cash forecasting can lead to unexpected shortfalls or surpluses and make it hard to plan for expenses and investments.
  • Excessive reliance on credit.  Overreliance on credit or borrowing to fund routine operations is a sign of poor cash management.  Debt is necessary for growth.  But excessive borrowing can put a tremendous strain on a company’s financial health and increase interest expenses.
  • Inability to seize early payment discounts or negotiate favorable terms.  If your business consistently misses out on lucrative early payment discounts or struggles to negotiate favorable terms with its suppliers, cash management deficiencies may be the culprit.  
  • Lack of emergency reserves.  If there’s one lesson that businesses learned over the past several years, it’s that they need to be ready for anything.  But many businesses don’t have adequate emergency reserves or cash buffers to handle unforeseen expenses or economic downturns.  If this is the case for your business, better cash management practices may help.
  • High levels of aged inventory or obsolete assets.  Few things can tie up valuable cash like accumulating excessive levels of aged inventory or holding onto obsolete assets.  Poor inventory and asset management can be a sign of deficiencies in your cash management.
  • Inaccurate financial reporting.  Accurate financial reporting is crucial for informed decision-making and effective cash management.  Frequent discrepancies between projected and actual financial results may indicate weak cash management practices.  
  • No cash management strategy.  If your business lacks a cash management strategy or doesn’t actively monitor and analyze its cash flow, it may be time for a refresh.  Developing and implementing a cash management plan can positively impact your financial position.

If any of these issues are familiar, improving your cash management practices may be the solution.

Strategies to improve cash management

Optimizing your cash management requires a proactive approach. 

Here are several proven steps that your business can take to better manage its cash:

  • Develop a cash flow forecast.  You can’t improve what you can’t see, the old saying goes.  Create a detailed cash flow forecast that estimates future inflows and outflows.  This will help identify potential cash shortages or surpluses and allow for proactive decision-making.
  • Keep tabs on your cash flow.  Regularly monitor and analyze cash flow statements to understand how cash is coming into your business and how it is being spent.  Highlight trends, identify areas for improvement, and act fast to seize opportunities for improvement.
  • Optimize accounts receivable.  Receivables are the lifeblood of the business.  Implement strategies to accelerate the collection of receivables.  Offer incentives for early payments, establish clear payment terms, promptly issue invoices, and act fast on overdue payments. Consider using technology solutions for efficient invoicing, cash application, and collections.
  • Streamline accounts payable.  Optimize cash flow by renegotiating payment terms with suppliers, automating invoice approvals to reduce late payment fees, taking advantage of early pay discounts, and evaluating vendor relationships to ensure cost-effectiveness.
  • Control expenses.  Evaluate expenses regularly to identify areas where costs can be reduced without negatively impacting operations.  Track budget performance to flag “maverick” spending, negotiate better vendor pricing, and seek competitive bids for essential services.
  • Optimize your inventory.  Manage inventory levels carefully to avoid overstocking or understocking.  Excess inventory ties up cash, while insufficient inventory can lead to lost sales.  Analyze historical data to forecast inventory requirements, adopt just-in-time inventory management, and consider drop shipments and other arrangements with suppliers.
  • Take control of debt.  Now is the time to explore refinancing at better rates or negotiating more favorable terms.  Develop a debt repayment plan to minimize interest costs and ensure timely payments to maintain a good credit rating, even during a recession.
  • Bulk up your cash reserves.  Build up emergency reserves to provide a buffer for unexpected expenses or economic downturns.  Set aside a portion of profits regularly and maintain a cash cushion that aligns with the business’s risk profile and financial goals.
  • Automate.  Leverage technology to automate cash management and cash forecasting processes such a invoicing, cash application, and reporting.  Automating can help cash managers improve accuracy, efficiency, and provide real-time visibility into cash flow.
  • Be ready to adapt.  Regularly review and update cash flow forecasts and monitor financial performance to adapt strategies to address changing circumstances and business goals.

These strategies will help improve your cash management and position the business for growth.

Take control of your cash management

Effective cash management is crucial for the financial stability and growth of any business.  By proactively addressing common cash management issues, cash managers can enhance liquidity, minimize financial risks, and capitalize on growth opportunities, no matter the economic situation.

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