A distinguished product, a perfect team, a superb reputation – none of it matters if your business has no cash!

The reality is that 4 out of every 5 businesses fail due to poor cash flow management.

It would seem logical that following on from this, every business owner would have a clearly defined and well managed strategy to avoid running into cash flow problems and have a plan to improve cash flow when problems do arise, but amazingly this is very rarely the case.


In an environment where every penny, cent or fen counts, businesses are finding new ways to make working capital work as hard as it can to contribute to cash flow – and, ultimately, the bottom line. If every business owner understood the risks they face operating their business and had a strategy to overcome those risks, the business success rate would be vastly improved. On one level having the right products at the right price in the right markets are vital ingredients for success – no change there, but they are only part of the recipe: since the piece that has been overlooked by many is the corporate imperative of watching like a hawk how quickly invoices are settled by customers, that bills are paid on time (and not before) and stock doesn’t gather dust on the shelves after production.

Attention to working capital management has become a lost art. There is a fallacy that working capital management is a magic formula – but there are a number of levers that are freely available for companies to pull. Like simply making sure that the teams in financial operations are carefully following basic cash management disciplines when preparing payments with the correct value date, and collecting in a timely manner. These connect to cash management basics and recognise that process costs are not simply a matter of squeezing the right tariff; rather, making sure staff are attentive to clear operating procedures far outweigh a few thousand dollars of savings generated from lower fees.

Calculating how much working capital a company needs, and optimising its deployment, are related challenges. Businesses are being trapped between suppliers, who are asking for earlier payment and customers, who want better credit terms. The key is to focus on the cash flow needs of the business – cash starved will be of no benefit if the outcome is insufficient funds for payroll and local taxes.

As multinational companies seek to expand, widening their supply chains and moving into new markets, inevitably the potential for inefficiencies in the cash management system rises exponentially, which in turn impacts on efficient working capital management. The sums involved individually may be relatively small: an overdue issued invoice, a payment remitted from the account a couple of days early, finished goods delivered late elsewhere – all these factors add up, with a huge cost to the company.

Then, there is another issue – sloppy management of balances left in operating accounts at the end of each working day. Fact: there have been a range of powerful liquidity management tools and techniques available to treasurers for many years. So why are there still too many instances of companies borrowing – yet having sufficient cash to cover that debt? Proper and active controls of such balances in different markets and different currencies, even in low interest environments, will yield significant benefits directly to the bottom line. The old barrier to this, often known as ‘trapped’ cash’, is coming down: even China, which has a legacy of capital controls, is now allowing international companies to move currency in, and out of, the country as part of their global treasury management operations.

If poor cash flow is the biggest threat to a business then why do so many businesses fail to control their cash? Well, the truth is, it requires specialist knowledge and can be complicated unless you have the right systems in place.  Each business has a different cash flow cycle. Trading patterns within a business change from month to month depending on a range of factors and it is very easy to be caught out.

When cash flow problems arise it is very easy to ignore them in an attempt to battle on and hope the problem will go away. Cash flow management is not a short-term fix to a problem but should be part of the fabric of the business; a systematic approach, which should underpin every business wishing to ensure long-term stability.

There are many aspects to cash flow management but by way of a summary, CFOs should:

  • Review the scope of their cash flow challenges
  • uncover all weaknesses and threats
  • Create  internal and external communication plans to make sure all parties are kept fully informed
  • Ensure that the bank is reconciled and accounts are up to date
  • Limit and consolidate their outbound payments to simplify the cash flow management process
  • Determine immediate cost saving opportunities within the business
  • Communicate with the bank so they are ‘on side’
  • Discuss bank facilities with bank manager such as increased overdraft or other lending possibilities
  • Devise a new short term cash flow visibility plan so that decision makers can see the impact of their investment decisions in advance
  • Review payments owed and devise strategy to accelerate inbound cash flow
  • Review outbound payments to suppliers and devise strategy to ensure suppliers are kept happy and to limit outbound payments where possible
  • Identify hidden or underperforming assets which can be monetised

Failing to have a detailed and well-crafted cash flow management plan is perhaps the single biggest risk a business can take.

Check Also

As treasurers embrace change, can their banks?

The state of the relationship between banks and corporate treasury could be the difference between …