Cash flow is a way of measuring how effectively a company receives money from different sources, like sales and investments, compared to the way it spends money on operating expenses, investments, etc. It is one of the most vital financial metrics a business can track to determine performance.
If a company is not diligently managing how cash enters and exits the business, it can stifle growth and cause the business to hit a ceiling beyond which it will be unable to grow or possibly recover.
The good news is that there are a number of things you can do to improve your company’s cash flow. Optimizing financial processes can free up cash flow that can then be used to expand products and services offered and allow the company to invest in growth drivers. This ultimately results in a company that is financially strong and helps increase shareholder value.
In order to optimize your cash flow, the first step is to measure it in order to determine a baseline. If you are not happy with your current cash flow position, set targets that will allow your business to thrive and take the necessary steps to achieve those goals. It is also important to continually monitor cash flow to ensure you stay on track.
A great place to start improving your cash flow is to optimize your accounts payable and accounts receivable processes, which account for the majority of the cash that flows in and out of your business. Centralizing AP and AR processes, developing a procurement strategy and automating both AP and AR can lead to significant cash flow improvement.
Keep in mind these three ways to optimize cash flow
- Reduce inventory held
- Reduce days sales outstanding
- Increase days payables outstanding
Best-in-class companies are achieving these outcomes by having Procurement, AP and AR work closer together and in a more symbiotic fashion. This is a major shift from the silo approach that has historically governed these areas.
A more holistic approach to Procurement, AP and AR will make it easier for you to make the necessary changes in those key areas that will, in turn, generate new and creative ways to optimize cash flow.