Four Cash-flow Techniques for the Modern Business

There are many ways to go about building a successful business. You can take courses on achieving product-market fit or how to pivot in an agile manner. You can make efforts to break through new markets and capture enough customers. You can strategise to increase the value of your current customers. Many other tips abound.

However, at the end of the day, it all comes down to one thing: the bottom line. Your cash flow determines the health of your business. You need to have enough runway to continue pivoting. You need to have enough cash to pay what you need to pay this month and the next ones. Otherwise, your business will go under.

Investor Tim Berry wrote that 82% of businesses fail because of cash flow problems. That’s more than eight out of ten. The signs are often not obvious. Even businesses that seem to be growing and making a profit often have unhealthy cash flow.

What seems good on paper might not be good in practice. Sometimes, companies need to pay urgent bills before any receivables arrive. Other times, company growth ends up increasing expenses a lot more than what it can handle.

Profit and growth are matters of accounting and projection, not liquid cash at hand. This is why spend management is a crucial area. A business needs to pay close attention to its spending, whatever the size and stage it is in.

Four key ways to improve spending

Cash flow is very easy to understand. It is simply the flow of money that goes in, and money that goes out. A business can survive if the cash inflow is greater than the cash outflow—or, alternatively, if it has enough cash runway to sustain itself through the periods where the outflow is larger than the inflow.

There are many techniques to improve cash inflow. The pricing of your products can have a large impact. Offering discounts to incentivise faster payments may be a good idea. More marketing activities to open new sales channels can be beneficial in the long run. However, these activities can suck up cash, even as you are growing.

Thus, we need to pay attention to the other side of the flow. Whether you are already making money or sustaining yourself through the reserve from your latest round of funding, cash outflow is of crucial importance. The following are four key ways to improve your spending.

1. Lease, don’t buy

Buying assets can often give you a better price. After all, if you have the money at hand, why buy the items to save up? This is a very logical idea. But it’s also a temptation that we must resist.

While buying seems like the better option, remember that it’s not always about accounting. More often than not, it is about month-to-month financial management. Paying in smaller amounts is much easier to manage, predict, and calculate than one large expense all at once. This way, you will have more operating cash to work with on a month-to-month basis.

2. Aim for bulk purchases

It is no secret that suppliers can often give a better price with bulk purchasing. Understandably, you might not always want to do bulk purchasing. Perhaps you don’t need the item in bulk. Perhaps you don’t have anywhere to store them. Or perhaps the items are perishable, and buying in bulk will only result in many spoiled goods.

However, a purchasing collective may be a good solution. Most likely, your company is not the only one needing those goods. Working together with other companies of a roughly similar size to yours can do wonders. You will be able to get a bulk discount without having to end up with too many items on your hand. Plus, the supplier will be happy to receive a regular order of bulk items. It’s a win-win solution.

3. Negotiate with suppliers

Maintaining a good relationship with suppliers goes a long way. When you are trustworthy, your bargaining position will also increase. Some suppliers may be willing to give their regulars a lower price. Try to sweeten the deal by always paying early. This may also improve their cash flow.

Alternatively, you can also try to negotiate for a longer time frame to pay for your purchases. This way, you can avoid having to pay early invoices. Payables that are due before receivables can be collected may spell disaster for your company. Negotiating the time frame of your expenses may improve your cash flow in ways you might not have realised.

4. Pay attention to operational spending efficiency

Perhaps most importantly, pay attention to efficiency. When you are focused on your day-to-day tasks, it is tempting to just let legacy operational tasks do their thing in the background.

It’s easy to forget that you are paying for a subscription to a service you no longer use. Perhaps you have downsized your headcount, but continue to pay for an IT infrastructure to support a company twice your current size. Perhaps your business processes are not aligned, resulting in unnecessary duplicate expenses.

Evaluate early, evaluate often

The four key points above are not a one-time done deal. Evaluation is crucial; it must be done early and often. At least once per quarter, do a deep dive and reevaluate your expenses.

Business processes evolve, and conditions change. You might realise that you can now buy more things in bulk than you did last quarter. Perhaps you did not have enough of a network to build a purchasing collective last time. Or perhaps your relationship with suppliers has improved, and you now have a higher bargaining position. Perhaps you can offer something this time which you couldn’t last time.

Operational efficiency must also be evaluated. There may be inventories that have become liabilities. There may be subscriptions that you no longer use. Legacy processes and software might be unnecessarily costly. Business processes might have changed and introduced new inefficiencies.

Evaluating your position and asking these questions regularly can help you realise the changes your business goes through and optimise accordingly. With an early and frequent evaluation, you can make sure that you never spend more than what you absolutely need to.

Utilise a proper software

Our business’s cash inflow may not always be ours to control. There will always be clients who are late in paying invoices. Or perhaps we just happen to be at that period where we need to rely on our reserve runway.

Our cash outflow, on the other hand, is fully our responsibility. We can always evaluate, negotiate, and optimise. This is why spend management is crucial to a business’s longevity.

However, evaluating and optimising these various expenditures can be a daunting task. It can involve a lot of moving parts. If not done carefully, it may introduce new problems. Traditional spend management takes up a lot of precious time. There may be information silos. And most importantly, human errors in data entry can cause fatal errors.

Hence, for the best result, we recommend the use of software. SAP Concur can help you perform all these spend management tasks efficiently. The suite also comes with other functionalities, such as a tool for automated invoicing and travel expense management.

Paying attention to your spending can be the determining factor of whether your business can thrive. With proper spend management, your business is already the exception rather than the norm.