If theres one thing businesses have learned over the past few years, it's that uncertainty is a certainty. Even the most AI-powered, data-informed forecasts cant predict every kind of economic downturn, and companies must make themselves more resilient by operating a responsible and proactive cash flow management strategy.
By doing so, you steel yourself against the need to panic at every unexpected market event and create a more financially sound organization that can thrive in any condition.
In this guide, we'll look at seven tactics you can use to level up your cash flow management right now, so you'll be ready for whatever is next on the horizon.
Effective cash flow management goes hand in hand with cash flow visibility the ability to track, monitor and forecast the movement of cash in and out of your organization.
Cash flow visibility is important at any time, but especially so during periods of economic uncertainty like those we've seen over the past few years. It enables you to more confidently navigate changing markets and create agile strategies to remain resilient.
Here are some of the specific areas where cash flow visibility can help you excel:
By clearly understanding their inflow and outflow of cash, companies can make informed financial planning decisions related to investments, expenses and working capital management.
During economic uncertainty, when market conditions are more volatile and unpredictable, having a clear view of cash flow also helps businesses better understand their financial health and make necessary adjustments to maintain stability.
Economic uncertainty often leads to disruptions in the financial markets, reduced customer demand and supply chain challenges. In such situations, businesses may experience cash flow constraints or unexpected cash flow gaps.
Cash flow visibility enables companies to identify potential liquidity issues in advance and take appropriate measures to bridge any gaps. It allows them to optimize cash reserves, negotiate favorable payment terms with suppliers and secure alternative funding sources if needed.
Economic uncertainty introduces a higher level of risk to businesses, and it becomes crucial during these times to assess and manage risk more actively and thoroughly. Cash flow visibility helps identify potential risks and their impact on your company's financial position.
For example, a better view of your cash flow can help you evaluate your exposure to customer defaults, assess the stability of your revenue streams and anticipate disruptions in your supply chain.
Your business leaders can then implement risk mitigation strategies such as diversifying the company's customer base, renegotiating contracts or adjusting inventory levels.
During economic uncertainty, businesses may need to make critical operational decisions to adapt to changing market conditions. Cash flow visibility is a much needed input for determining the financial implications of these decisions.
For instance, having a good handle on your current cash flow helps determine the feasibility of new investments, the timing of capital expenditures or the viability of cost-cutting measures.
Cash flow visibility is also essential for facilitating effective communication with stakeholders such as investors, lenders and suppliers. During periods of economic uncertainty, stakeholders are often concerned about the financial stability and liquidity of the companies they do business with.
Transparent and accurate cash flow information builds trust and confidence among stakeholders, facilitating better relationships and potential support. Being able to access this data easily allows your business to communicate its financial position, demonstrate its ability to manage cash flow effectively and provide reassurance during challenging times.
With capital harder to come by these days, most companies are turning their attentions away from revenue growth and towards cash management. When it comes to improving your cash position, operational efficiency is the name of the game.
Here are seven levers you and your finance team can pull to maximize cash on hand:
Days payable outstanding (DPO) is an important cash flow metric that measures the average number of days it takes your company to pay vendors. While it may seem counterintuitive, extending your DPO can be an effective way to maximize working capital during a recession or other unexpected economic downturn.
If you plan to utilize this strategy, its important to do it with care. Consider your individual vendor relationships and how changes to your payment schedule may impact them. In addition, keep in mind that other organizations may be utilizing similar tactics. Just as you are waiting longer to make certain payments, you may experience delayed incoming payments from customers.
Exercising this tactic is best done when you also have a complete planning tool that gives you total visibility into your company's overall financial situation at all times.
Cash flow forecasting is necessary at all times, but during times of economic uncertainty, it needs to become a more active part of your ongoing cash flow management process.
In other words it cant be a quarterly or monthly report. At any given time, you need to be able to look at your cash flow and see an accurate future forecast to inform strategy decisions.
Cash flow management software tools with built-in capabilities for this type of automated and data-driven cash flow forecasting are especially useful in this regard.
An example of an Operating Expenses Dashboard for comparing operating expenses across the prior year, current year and plan year. This Excel template is from Venaand its available to you for free.
A recession provides a compelling reason to check your profit margins and look for ways to maximize them further. Are there places you can save on costs? Areas where demand is higher and there may be an opportunity to boost prices slightly? Are certain products and services worth prioritizing based on demand and profitability?
When it comes to profit margins, small changes over time can make a big impact when you're looking for any way to increase working capital.
As with some of the tactics we mentioned already, maximizing profit margins is made much easier with the support of a comprehensive planning platform where you can centralize finance data and easily manipulate it to deliver the exact insights you need.
During the onset of the pandemic and the ensuing few years, supply chains were one of the most highly impacted facets of business operations. Companies were hit with unexpected cost increases and an overall lack of control over when materials or products would reach their final destinations.
It created a need for organizations to revisit their supply chain strategies. While it may have made sense to go with the cheapest option at one time, continued uncertainty required many businesses to pay a higher price to work with suppliers who had more reliable networks and other built-in safeguards against delays.
In other cases, the opposite may be true. Your cash flow situation may require you to look for more affordable options rather than a higher-priced vendor you used in the past.
The takeaway is this: Recessions and other market uncertainties are a good time to revisit all of your vendor relationships and decide if any changes can or need to be made in order to improve cash flow for the foreseeable future.
One way to give your incoming cash flow a much-needed boost during a recession is to look at your aging accounts receivables and prioritize those with large balances and/or those that can be collected quickly.
Start by creating an updated accounts receivable aging report, as outlined below:
Once you have an idea of what your aging accounts look like, you can take steps to collect outstanding balances from clients.
Remember that other organizations are probably in the same economic situation as you. That means you wont necessarily be able to send a new invoice to each customer and expect full payments to roll in. What you can do is communicate with them more intentionally to get payments active again and gradually get accounts back on track, thereby increasing your working capital over time.
At the same time, when you issue your customers payment reminders, you can likely expect some prompt payments to come in, which will help give your incoming cash flow a quick lift.
If you haven't done it already, the time to automate your FP&A processes is now. Managing tasks like data consolidation and financial reporting manually prevents you from spending time on analysis the type of work that will help you land on strategies for improving your cash position.
Here are some of the key processes FP&A software can optimize and automate for better cash flow management:
Mountain Seed, a leading tech-driven real estate services organization, recently learned just how powerful automating with FP&A software can be for their cash flow management.
By increasing visibility of costs using driver-based modeling and drill-down functionality in the Vena platform, they cut a staggering $40,000 of unnecessary expenses just two months alone and ignited greater collaboration across the organization.
Every employee in some way or another contributes to cash flow and the overall company expenses. At any time but during a recession especially it's important to make everyone more aware of their contributions to company expenses and educate them on how to be smart about business decisions.
But heres the catch: It should not happen in a way that makes employees worried about the financial health of your organization.
Instead, communicate the need for smarter financial decisions in an opportunistic way. Be sure to reinforce that you're implementing cash flow management strategies that will keep your company resilient during an uncertain time, and that they have a chance to be part of that effort.
In fact, employees generally feel more motivated and engaged when communication is transparent and they can see how their actions are tied to organizational objectives.
Excision BioTherapeutics, a fast-growing biotech startup based in San Francisco, achieved this level of transparency and engagement by leveraging Venas platform for more granularity in budgeting.
By using Vena to gain shared, drilled-down views of budgets from across the organization, Excisions FP&A team gained critical buy-in from budget owners who now better understand their role in the larger organizations success.
Effective cash flow management shouldn't only be top of mind when theres a recession on the horizon.
Smart, financially healthy organizations use proactive and ongoing cash flow management to prioritize cost-effective and strategic operations at all times, and to be better prepared if and when inevitable economic downturns occur.
The first step is to know where you stand, then determine which tactics (like the ones we outlined in this guide) will help your organization target potential cash shortfalls and remain resilient no matter what external forces are at play.
Did you find this article helpful? If so, you might enjoy this related content:
5 Strategies for Managing Cash Flow in Complex Business Conditions
7 Tips on How To Recession-Proof Your Business's Revenue Planning Process
6 Ways CFOs Can Lead the Fight Against Inflation
Plan and compare your OpEx expenses with our free Operating Budget Template.
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Melissa Howatson, Chief Financial Officer at Vena, has a wealth of experience in financial and consulting roles, ranging from EdTech, automotive and Big Four accounting firms. She was CFO and board member at D2L—a global learning technology company—and led its successful initial public offering in 2021. Prior to that, she held finance leadership positions at Bend All Automotive, Qwalify and Primal. Melissa is a CPA-CA, having obtained her designation while working in KPMG's assurance practice. With her combination of scale-up and start-up experience, Melissa has an impressive track record of building and leading successful finance teams that drive the business forward.
