“Growing accounts receivable can put serious strain on smaller businesses that may not have the cash reserves to absorb delays in receipts,” Beaver says. “For most companies, cash flow forecasts are less than 75 percent accurate.”
One approach to anticipate likely variables is to look at historical performance. What percentage of receivables is usually collected during slower seasons? That figure can be applied to open receivables to help estimate the likely pace of receipts.
Faster receipts
Historic data may provide a less-than-reliable foundation for future forecasts. Whatever the estimates for what lies ahead, businesses can obviate cash squeezes by accelerating accounts receivable and stretching accounts payable.
For accounts receivable, experts advise running regular aging reports. How much do customers owe in increments of two weeks, 30 days and 60 days? Any growth in the numbers over time might indicate a steady deterioration of cash flow.
Keeping in close contact with customers can also help accelerate receipts by providing opportunities to request timely payments and help spot nascent issues that may evolve into future roadblocks.
“Maintain a good handle on what customers are doing,” Anderson says. “What are their future sales activities? Are they encountering problems that may affect operations?”
Not all customers are of equal importance, and it’s smart to concentrate efforts on the most profitable. Account reviews can identify which customers should receive the most attention.
“So much of the important information required to monitor cash flow is tied to a selling cycle which varies by customer,” says Frank Cespedes, senior lecturer at Harvard Business School. “Some buyers say ‘yes’ or ‘no’ when you make a call; others require multiple iterations of proposals. Some buy what you have in inventory; others require customized items. Those things affect the time to receive cash and the cost to fulfill orders. Good account reviews unearth that information.”
Companies can also explore requiring larger deposits from customers, according to McQuaig. Sweeten the increase by emphasizing customer benefits. Maybe you already have some needed pipe in inventory that the customer can come and see. Or, offer free early delivery so the customer can maintain the pipe on site. Emphasize that earlier payment helps the customer avoid higher prices later.
As for the outward flow of cash, a tried-and-true tactic is delaying the payment of monies owed.
“Good financial management on the buy side has always stretched out payables,” Cespedes says. “This is particularly so in an inflationary environment where businesses must pay a lot more attention to the payment cycle.”
Stretching payables can, of course, backfire. For starters, it can mean the loss of the discounts many companies offer customers who pay before their due dates. It can also result in higher prices for goods and services.
“Extending too far makes you more of a risk,” Beaver says. “And suppliers tend to give better prices to customers that are less risky.”
There’s also dependability of deliveries to consider: Ongoing supply chain disruptions will cause vendors to favor deliveries to customers who pay on time or early. The cost of not having essential materials can be greater than the interest cost required to borrow money to bridge cash gaps.
Mitigating costs
In an inflationary environment, suppliers of goods and services tend to raise their prices. And higher rates of inflation tend to make the increases bigger.
“When inflation is 2 percent, everything tends to increase by that amount, plus or minus a little bit,” Conerly says. “But at 7 percent inflation, say, prices tend to increase by that amount plus or minus a lot.”
Businesses should try to get readings on anticipated future increases and shortages. This can be done by maintaining close contacts with vendors.
“Work closely with suppliers and develop good relationships with them,” McQuaig says. “What do they see ahead in terms of product availability and price?”
There is another advantage to close contact, McQuaig explains: Suppliers may give you more favorable treatment. For example, you might leverage any significant volume you’re doing by asking a vendor to hold inventory you would normally keep in stock. You can also ask if a price commitment now will remain firm for the season’s duration.
Another cost-saving move is to pursue less expensive alternatives to pricier goods and services.
“Domestic inflation has been higher than in most of the world,” Conerly says. “Some businesses are shifting sourcing to other countries.”
Finally, dig deeper into the reasons for suppliers’ price hikes.
“Are goods and delivery cost increases in line with inflation?” Beaver asks. “Or, are suppliers trying to pad their own margins a little bit, just because they see inflation as an opportunity? That sometimes happens.”
Trimming inventory
Before inflation appeared on the horizon, businesses responded to supply chain disruptions by purchasing and holding whatever they could get their hands on. Any step to avoid running out of product seemed like a good thing.
Times have changed. Now, too many warehouse goods can tie up cash at a time when company treasuries need more liquidity.