Whether directly facing one of the above challenges or not, businesses seeking to improve their cash flow position have several routes available.
Strengthen cash forecasting abilities
Improving the accuracy of cash flow forecasts can greatly help cash flow management. With a better understanding of how cash flow will change in the future, businesses can adopt a cash position that prepares them to make the most of the situation.
Technology can play a major role in facilitating better cash forecasting. Using a dedicated cash forecasting solution to run multiple scenario-based cash flow projections means businesses can move forward confident that they’re not heading toward danger. This also means they can confidently make better use of working capital that they otherwise would have preserved to build resilience.
Shorten the cash conversion cycle
The cash conversion cycle is a metric that measures how long it takes a business to convert cash into inventory and back into cash again. It’s calculated using a formula containing three inputs (days payable outstanding (DPO), days sales outstanding (DSO), and days inventory outstanding (DIO)), and improving performance in any one of those three inputs will shorten the cash conversion cycle.
DPO and DSO can be optimized by improving accounts payable and accounts receivable performance, respectively. DIO can be optimized through new approaches to inventory, including prioritizing and reducing slow-selling inventory stockpiles.
Review inventory management strategy
Finally, businesses can use inventory management strategies to their advantage, adopting an approach to inventory that suits their cash flow aims. By increasing or decreasing the amount of inventory and how it’s held, businesses can manage how much of their cash is held up in stock.
For businesses looking to strengthen their cash position in the short term, this might involve reducing the amount of safety stock kept on hand, at the risk of missing sales if demand increases. For others more concerned with long-term resilience, accepting the cash flow hit by keeping safety stocks might take priority. Source