What Is Cash Flow: Management & Automation

Winning a large piece of new business or an influx of new clients is every entrepreneur's dream. But that dream can quickly turn into a cash-flow nightmare if your business doesn't do the right preparation and have a solid growth strategy.

Simply put, cash flow is the amount of money that comes in and goes out of a company. Balancing the in-flow and out-flow of cash is crucial for operations and growth.

For instance, your business may need to hire more staff and make significant investments in new equipment, materials, technology and space in order to accommodate rapid growth. And you may need to do all that long before you collect sufficient revenue from your new customers to cover the costs.

If your customer pays on 60- or 90-day terms but you have to pay vendors and employees every 30 days, as well as immediately step up purchasing, you could soon face a cash crunch that threatens your company's ability to operate.


Creating a Cash Flow System that Works for Your Growing Business

Fortunately, there are a number of tools — including credit linesequipment loans, contract terms that help you get paid faster, payment technology that allows you to retain cash in your accounts longer and reduce your expenses, among others — that can help your company maintain a healthy cash flow while you're expanding.

"It's one of those things where you have to work smart in every decision you make," said Nicole Auyang, a regional manager of business banking at City National Bank.

She suggested that companies detail their likely cash flow needs for the next three, six, 12 and 24 months. That's a way to get started looking at the whole picture and putting together the right combination of moves to support your growing success.

Prepare for Growth

Business consultant Kamyar Shah suggests that companies develop and follow standard operating procedures (SOPs) to stay in good shape as they grow. While entrepreneurs can't predict every possible scenario, they can foresee and properly plan for the most likely business situations, he noted.

Cash-Flow Decision-Making

Shah recommends that companies avoid making decisions driven by hunches or emotion and adopt what he calls "cash-flow decision-making," which relies on two key questions: Can the company afford the new contract, or other new business, without interfering with existing initiatives? And how will the monetary aspect of the decision affect the organization's liquidity, including the ability to fund incidentals or cover emergency expenses?

If a small company in a growth or scaling mode, for instance, is approached by a smaller competitor hoping to sell, answering these questions should help in eliminating the emotional elements from the decision, he said.

"Though it sounds pedestrian, it is a very effective method for balancing growth and scale in a way that does not jeopardize or interrupt the cash flow and/or financial stability of the organization," Shah said.

Beyond this general strategy, there are several specific steps you might take to keep your cash flow on the right track as you rapidly expand. Growing businesses may use a combination of these tactics and tools to ensure a healthy cash flow.

Calculate Your Cash Cycle

Growing businesses often seek increases in their existing lines of credit as they try to manage cash flow to offset the timing of their "cash conversion cycles" — which measure the period needed for a company to convert investments in inventory or other materials into cash.

This requires that a company have a good handle on its accounts receivable, accounts payable and, if applicable, the amount of time needed to sell inventory.

If a customer has 30-day terms to pay you, how much time do you need to cover your accounts payable, and on average how long does it take your inventory to turn? Identifying the timing is important, said Karen Kiang, a City National Bank credit manager. She noted that fast-growing firms often must ramp up spending for new resources to keep up with new demand.

Various software products can help you make monthly cash-flow projections. Business owners should work with their bookkeeper, controller or CFO to make sure cash flow is adequately managed, said Kiang.

Once you have a good picture of your cash-flow needs, you may consider a number of potential options for narrowing and bridging any gaps.

Negotiate Payment Timing

Depending on contract terms, you may be able to talk to vendors and clients about payment arrangements that improve your cash flow.

A company that enjoys good relationships with its suppliers may be able to stretch out payment schedules, Kiang noted. And businesses can also consider offering discounts to customers willing to pay on a shorter schedule, which may in turn entice those clients to purchase more product, she said.

Embrace Payment Technology

An online, electronic-payments platform can help you manage cash flow. Your business, for instance, may be able to hold onto its accounts-payable cash for an extra week by replacing paper checks with electronic payments.

If you're paying vendors, your landlord or others the old-fashioned way, you may have to issue checks seven to 10 days before they're due. However, if you switch to electronic payments and deposit the funds directly into payees' accounts overnight just before they're due, "you really gain that extra six days in cash flow," said Auyang.

While six days may not sound like a long time, “those days can be crucial in a rapid-growth environment," she said.

In today's electronic-banking environment, many vendors are starting to accept corporate cards for payments rather than waiting for checks to clear, said Auyang. It may be worth investigating whether that possibility could benefit your business. Clients of City National Bank can ask their relationship managers to make the necessary arrangements for them to set up corporate card payments with their vendors, for instance.

Combining favorable depository options with the right loans or credit lines can give you a powerful cash-flow toolbox.

"There are a lot of different mechanisms that banks can offer," Auyang noted.


6 Tips for Automating Your Cash Flow Management

Many small business owners devote extensive time and energy trying to manage and speed up accounts receivable and accounts payable. Their time can be better spent sealing business deals and bringing in new clients.

Automating cash flow can help owners focus on growth.

What To Look for in an Automated Cash Management System

Online platforms that link bank accounts to accounting software can help eliminate the need to do double-entry for invoices and streamline the process of paying vendors and getting paid by clients.

When deciding to automate your cash management system, there are a few key elements to look for to ensure you're making a worthwhile investment.

Use Easy-To-Use Software

Seek out a software that has an intuitive, user-friendly financial interface that is easily accessible from mobile devices. It should integrate with your accounting software and allow you to view transactions in various phases of processing and approval.

“Even a small thing can be a great help, like having easy access to the company's cash balance on an online dashboard," said Frank Rojas, regional sales manager at City National Bank. Because accounting employees often start their workdays by checking that balance, "the dashboard becomes a gateway into figuring out if they need cash or if they have excess cash, and it sets the agenda for what they need to do from there."

Take Advantage of Electronic Deposits

Scanning checks to deposit them in your account electronically ensures that your business has access to the cash you need when you need it.

For example, if a small business has a slim cash margin, automated deposits can allow it receive money faster.

Visibility Into Transaction History

Quick and easy visibility into transaction history for specific vendors as well as on an aggregate “big picture" level gives you the ability to run reports for auditing purposes and request customized reports for specific needs. Because these insights could help you identify areas where spending could be better monitored or areas for potential business growth, this is extremely important for all business owners to have and review regularly.

Transaction Matching Capabilities

Another feature to look for is transaction-matching. This capability shows which transactions have cleared your account and compares them to a list of approved payments. The matching process must be completed daily and analyzed for any discrepancies to avoid financial losses. Automating this process not only saves a substantial amount of time, but it also reduces the likelihood of error that is common with manual entry.

Fraud Detection

When you're looking at options, ask about the safety and security of services provided. You want to ensure your business - as well as your employees, partners and clients - are protected.

Fraud detection features help employees to confirm that a check has been cashed by the payee - and for the correct amount. If something isn't right, under certain circumstances the business can elect to not have an item paid and have its account credited.

Security functions, like requiring a payment approver to use a passcode, are designed to help keep fraudsters from accessing the company's banking services and emptying its bank accounts.

Variety of Payment Options

The ability to easily select bills to pay, schedule payments and choose a payment method, such as check, ACH or wire transfer, can help stop minor inconveniences from turning into major disasters.

Small companies often have one person handling accounts payable. If that person is out sick or forgets to send that week's accounts payable file in advance of the due-date, vendors won't be paid.

Automated cash management can save the day with a well-timed same day ACH or wire transfer payment. The system sends an email alert that a payment is awaiting approval online. The approver can then log in via mobile phone or tablet and click “approve" from almost anywhere in the world.


Explore Your Financing Options

Make sure that your bank or service provider is equipped to provide quick, high-quality assistance with your questions or service issues. If technology fails, or you need further assistance, it's crucial that your business has access to the assistance it needs to keep operating efficiently.

Business owners, working with their bankers, may also want to consider a variety of debt options, including various types of credit lines, and other financing tools to help manage cash flow.

A working capital line of credit can bridge gaps until accounts receivables convert to cash, enabling businesses to buy inventory and pay employees, Kiang noted. Businesses might borrow against their assets to secure a revolving credit line for short-term capital needs, or seek increases in existing lines of credit.

If an expanding business needs to buy machinery or hire more people, it may need more permanent working capital in the form of 5- or 7-year term loans, said Kiang.

A company without immediate accounts receivable might benefit from an asset-based line of credit — formula-based financing that provides advances on accounts receivable or inventory, she said. This type of borrowing allows flexibility for rapid growth.

City National's commercial bankers also may refer clients to First American Equipment Finance, an affiliate specializing in equipment leasing and funding. Among the various options available, a sale and leaseback arrangement can help a company free up capital by selling equipment and then leasing it back to keep it in place and operating in the business.

Bankers, taking a holistic view, also may look at a business owner's personal finances and assets as part of determining how to support the company's growth, said Auyang. They might suggest, for instance, restructuring the entrepreneur's residential mortgage, or borrowing against their investment portfolios for short-term capital. A smaller company may decide to use its owner's home to secure a revolving business equity line of credit.

“We have equipment lines of credit that can just sit there until you need to draw on them. We can have credit facilities and capital in place to be ready when you're ready," said Auyang.

“Business owners," she said, “should leverage their banks and communicate fully with their business bankers, so that we can provide sound advice and solutions to help with the overall goal and need of the operating company."

This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.

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