Effective cash management involves analyzing and adjusting cash flows in relation to and in anticipation of changing market conditions. Daniel E. Stansky, founding partner of The SCA Group, LLC, a provider of comprehensive board and management advisory services for public and private companies, warns that failure to monitor changes in receipts and disbursements over time—and an inability to be ready with tactical shifts that can be deployed quickly and selectively within the customer and vendor base—can create liquidity problems that may not be easily fixed within the structure of working capital financing.

Dan Stansky
Dan Stansky
Partner, The SCA Group
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The gap between cash inflows and outflows should be monitored closely. Businesses need to keep a close eye on what consultant and author Ana Weber-Haber, founder and president of E-Play Magazine Corp., calls “the cash flow scale.”* The gap between inflow and outflow can be characterized as positive, safe or negative, and the scale can be tipped in one direction or another by various factors. Some of these, such as the need to purchase large amounts of materials before production, are controllable to some extent by the business. Others—such as an increase in slow-paying customers due to a general economic or industry sector downturn—are harder to plan for.

To tailor cash strategies around economic conditions, you’ll need a solid grasp of your business’s cash conversion cycle and the amount of time that elapses between the completion of a sale and when funds are actually received. “It’s crucial to make the cash conversion period as short as possible,” says Andrew Schrage, owner and editor in chief of Money Crashers, a financial advice Web site. “No matter how large your sales volume, if you can’t effectively collect on those sales, your cash flow will suffer, and that can make it impossible to manage efficiently.”

Make note of the formula for determining a cash conversion cycle: Add the number of days’ inventory outstanding to days’ sales outstanding, plus days’ payable outstanding, which is a negative factor. Companies typically exhibit a cash conversion cycle driven by the mix of products or projects purchased, and they rely on a stable formula, Stansky says. “When this mix is disrupted, the impact on the cash conversion cycle can be dramatic. The primary advantage of shortening the cash conversion cycle is the ability to quickly redeploy cash in response to changes in market opportunity without requiring external capital financing.”

Maintaining positive cash flow gives a business the greatest flexibility in tailoring responses to changing economic conditions. This may involve juggling collection and disbursement policies based on cash flow and sales projections and vendor commitment reports. But relationships must also be factored into your planning. “This is the most delicate area contributing to a healthy cash flow,” Weber-Haber says. Demonstrate integrity in meeting your obligations, take advantage of discounts offered for early payments, and maintain ongoing communication with vendors and creditors. On the customer side, extend terms and discount allowances when needed to get cash in early and keep the cash flow scale on the positive side, Weber-Haber advises.

Prompt invoicing, requesting partial payment up front, rewarding quick payment, deferring accounts payable and stepping up collections efforts are all strategies worth considering in various circumstances. “Consistent collections efforts are now requisite, as anything less will result in customers delaying resolution of disputed invoices,” Stansky says. “A business can no longer relegate cash management to the treasury department. The CFO must have metrics in place to monitor the cash conversion cycle and to supplement the enforcement of the business’s loan covenants.”

* Ana Weber-Haber, with Shel Horowitz, The Money Flow: How to Make Money Your Friend and Ally, Have a Great Life, and Improve the World. New York: Morgan James, 2013.