Strategic Approaches to Cash Flow Management

When it comes to commercial success, cash is king. Here’s how to preserve it.

It’s easy to take cash flow management for granted. You finance production, sell the good or service, use most of the proceeds to create more products, then repeat the cycle. But there are many ways to approach each facet of cash flow management. It’s important to get the right strategic mix to not only maximize your business’s immediate profits but also its ability to sustain them.

“Regardless of top-line revenue, the most important thing to a business, really, is cash,” says Mike Gilbreath, a Corporate Treasury Management Executive for Regions Bank based in Tampa, Florida. “Knowing your cash balance is critically important. You’ve got to have liquidity to be able to operate your business.”

Cash flow management has two main components: days sales outstanding (DSO) and days payable outstanding (DPO). Both are formulas. DSO measures the average amount of time it takes for a business to get paid for goods and services it has sold via credit. DPO, on the other hand, quantifies how long a company takes to pay its own bills.

Together they help determine liquidity. To get the most out of their cash flow forecasting, Gilbreath says, small- and medium-sized businesses should constantly be asking:

  • How much money do I have in reserves?
  • Do I have enough to buy inventory or to provide the service?
  • How long before I can collect payment? Can I collect even before I deliver?

All companies should be interested in collecting their receivables faster, Gilbreath says. By constantly calculating DSO, a business can see whether it’s taking too long to get money from its customers. Reducing DSO is one way to drive cash flow.

Using Technology to Bring In Cash Faster

Technology can spur that DSO reduction process. While many customers still use hard currency in their transactions and the response to paperless billing has been very positive, many businesses still receive payments by check. “Checks are going to be here for a long, long time,” Gilbreath says. Regions has equipment capable of handling even 100,000 checks a day for a given business. While that far exceeds the needs of many commercial businesses, the point is that technology can automate what is essentially the most manual of tasks. And the business can get its money that much faster.

The bank also has a new online product called Regions BillerXChange® that lets clients cut way down on paper invoices and statements, speeding up the incoming payments process. Customers can use their credit or debit cards, for example, to pay via an online portal or pay by phone using voice technology that can intuit their needs. Other customer payment options include interacting with a customer service representative or setting up online banking bill pay.

Leveraging Tools to Delay Payments

A judicious extension of DPO is another way you can improve cash flow management, Gilbreath says, and technology plays a major role here too.

A digital tool called Regions Integrated Payables helps the bank’s clients raise their DPO or extend the time they have to transfer funds to pay their vendors. For example, by using the product’s virtual card, a business’s vendors or employees can get the money owed to them immediately, but the business can hold on to its actual cash for as long as 30 days before the money behind that payment comes due with the bank.

The Quest for More Liquidity

Optimizing the DSO and DPO mix in the end improves a business’s liquidity—giving it more opportunities to advantageously deploy its working capital. If a business has excess cash, it can bank it and earn interest—overnight or for a longer period of time—until the money is needed elsewhere. A business can also use a positive liquidity position to reshape its human equity, with an eye more toward building revenue than funding back-office overhead, notes Dan Eveloff, a Treasury Management Executive for Regions based in Sarasota, Florida.

Applied to both the DSO and DPO sides of the payment ecosystem, automation is key. Regions is laser-focused on bringing the best financial technology products to its clients.

“Our approach to supporting our clients is very consultative, every day,” Gilbreath says. “What are their pain points? What strategies can we provide them that will improve their cash flow management? Our goal is to help develop the skill set of managing and automating the transactions that essentially make up the operating entity. Anything that we can ‘electronify’ for our clients, as a bank, we’re all about doing that.”

Three Things to Do

  1. Learn how incentivizing payments can increase your liquidity.
  2. Explore Regions’ integrated payables offerings.
  3. Contact Regions Treasury Management to learn about services to help you improve your company’s cash flow management.