Managing your company's finances effectively is not just about keeping the books balanced; it's about strategic foresight and ensuring your business can thrive even in tough times. As a business owner or financial manager, having a robust treasury management system is essential to avoid cash shortages that can be a major source of stress and seriously hamper your growth. Here are seven concrete actions you can take to safeguard your business’s financial health and improve liquidity.
Action 1 – Conduct a financial audit
Start with a comprehensive financial check-up to identify and fix any money leaks. This important first step helps you find ways to increase your profits.
Conducting a thorough audit helps you uncover inefficiencies and areas where money might be wasted. For example, you might find out that you don’t have the right reporting in place to anticipate cashflow challenges.
You also might find unnecessary recurring expenses or outdated contracts that need renegotiation.
Not sure where to start? We can help you with a full financial audit focused on your processes, tools and people. We can also help you with a full cost analysis to identify potential savings.
Action 2 - Optimize working capital
Working capital and treasury are closely related but are not the same. While your treasury refers to the liquidities directly available (cash and cash equivalents), your working capital represents the difference between current assets (like inventory and receivables) and current liabilities (like payables and short-term debt).
This means that optimizing your working capital will have a direct effect on your cash flows and thus, on your treasury. We're listing hereafter 3 ways to optimize your working capital.
a) Shorten client payment terms
Shortening client payment terms is, when possible, an easy way to improve working capital and thus, cash flow.
Suppose your business typically allows clients 60 days to pay their invoices. This delay can create a significant cash flow gap, especially if you need to pay your suppliers within 30 days. By speeding up your collections, you ensure that cash is coming into your business more quickly.
You can do this in several ways.
The most obvious way is to reduce your customers payment terms. For instance, if you usually allow clients 60 days to pay, try reducing this to 30 days to get your money faster.
But other effective strategies include advance billing, setting up direct debit arrangements, factoring receivables, and continuously monitoring the aging of receivables.
b) Negotiate better payment terms with suppliers
Negotiating better payment terms with suppliers helps align your outflows with your inflows, maintaining a balanced cash flow.
Aim to extend your payment terms to match at least your client payment schedules. This helps keep cash within your business longer. For example, if you negotiate 45-day payment terms with your suppliers while your clients pay within 30 days, you get a 15-day cash buffer.
c) Refine your inventory management
Improving your inventory management is another key aspect of working capital optimization. Reducing excess inventory without sacrificing responsiveness can free up significant cash.
Adjust inventory levels based on restocking times and sales forecasts, ensuring you have the right amount of stock.
For instance, a retailer might use a just-in-time inventory system, minimizing the cash tied up in stock while still meeting customer demand.
Action 3 – Develop detailed treasury plans
Plan your financial needs carefully with detailed treasury planning. This means forecasting future cash flows and preparing for different scenarios, so your business is always ready to meet its financial obligations.
A strong treasury plan helps you better manage your long-term financial strategy, avoid unexpected shortfalls and costly short-term borrowing.
Action 4 – Boost Profitability
Increasing your gross margin by optimizing both revenues and costs can significantly impact your cash flow. More EBITDA means more cash flow.
Here are some strategies to start with:
Reassess your pricing: Regularly check your pricing strategy to make sure it fits market conditions and cost structures.
Eliminate unprofitable products: Stop offering products or services that don't make money.
Negotiate cash payment discounts from suppliers: Take advantage of discounts for early payments to lower overall costs.
Consider part-time consultants over full-time hires: This approach offers flexibility and can be more cost-effective.
Review recurring contracts: Regularly check contracts to ensure they are necessary and cost-effective.
Minimize production waste and inventory losses: Use lean manufacturing principles to reduce waste and improve efficiency.
Action 5 – Invest in technology and training
Implementing advanced financial software like ERPs can transform your financial operations. These systems can automate routine tasks such as invoice processing, payroll, and expense management, which reduces manual errors, saves time, and ensures that financial operations are executed promptly.
This automation directly contributes to better cash flow management by speeding up processes and ensuring accuracy.
Moreover, these technologies provide real-time financial data, offering deeper insights into your financial health. With enhanced forecasting and planning capabilities, you can make more informed decisions, anticipate cash needs, and manage liquidity more effectively.
Training your staff to use these tools efficiently is crucial. Well-trained employees can fully leverage the software's capabilities, allowing them to focus on higher-value activities such as strategic planning and analysis, which further optimizes your treasury management.
Action 6 - Manage debt
Efficient debt management is crucial for maintaining a healthy balance sheet and optimal cash flow. Regular reviews of your debt structure can reveal opportunities for refinancing, potentially reducing instalment amounts, lowering interest costs, and improving cash flow.
Strategic debt management serves as a lever for financial stability and growth. For example, refinancing high-interest debt with a lower-interest option can significantly reduce interest payments, thereby freeing up cash for other uses.
Similarly, renegotiating the terms of debt when instalments are too burdensome can alleviate cash flow pressures.
Action 7 – Master Your Financial Data
To make informed decisions that optimize your treasury, you need to start with accurate and detailed financial data.
Ensure that your financial data is complete and up-to-date for precise analysis and timely action. Using financial dashboards and analytics can provide insights that help you make better decisions.
For example, spotting trends in your cash flow data can alert you to potential issues before they become critical.
Conclusion
Optimizing your company's cash management isn't just a task; it's a vital strategy to ensure longevity and profitability. By implementing these actions, you will not only improve your finances but also position your business for sustainable growth.
You are ready to take control of your financial future but unsure where to start? We can help with a diagnostic of your financial situation, expert advisory or structural financial support.
Feel free to contact us to discuss your specific needs.
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