6 Strategies for Managing Cash Flow During Uncertain Times

Economic uncertainty, technological advances, and other causes of market volatility often have ripple effects that can disrupt cash flow, posing serious risk for every organization. A cash crunch — either short-term or persistent — can shake business stability, limit your ability to capitalize on growth opportunities, or threaten the company’s survival.

In uncertain times, cash flow optimization is essential to support ongoing operations and facilitate long-term growth. These six cash flow management strategies can help you improve liquidity and maximize operational efficiency while providing additional peace of mind for business leaders and owners.

1.     Enabling Data-Driven Financial Decisions

Knowledge is power, and visibility into finances empowers better day-to-day spending choices. Take advantage of cloud accounting to integrate your tech stack as much as possible. Integrating your bank, credit card, and other financial accounts provides real-time data and insights into the organization’s financial position. Consider establishing key performance indicators (KPIs) that let you know it’s time to pull back on discretionary spending or pause new investments.

Leverage data analytics to evaluate historical information for more accurate forecasts. Analyze revenue and expense patterns from previous years to avoid surprises and gain actionable insights that help you set appropriate inventory and staffing levels.

2.     Budgeting and Forecasting for Uncertainty

Armed with data, you can get more value from the all-important budgeting process. Use rolling forecasts to predict fluctuations in revenue and expenses. Based on your cash flow forecasting, you can revise budgets to align with expense prioritization. Try to build in extra flexibility, too. That will allow you to adjust on the fly if the unexpected circumstances threaten anticipated income or present additional cash flow needs. Apply revenue forecasting to specific events that could pose a threat, such as:

• Project delays from a construction client
• Loss of revenue from tariff-stressed customers
• Significant price hikes for inputs
• Rising labor costs
• Costly changes in tax policy

Figure out the best way to respond in each scenario so you’ll have a blueprint for quick action if any of these events come to pass.

3.     Building and Maintaining Cash Reserves

Cash reserves act as a critical safety net during downturns. The backup liquidity allows you to cover tax bills, make payroll, and fund operations when revenue drops or unanticipated expenses arise. But devoting more than you’ll need to cash reserves keeps these funds from contributing to growth initiatives and other strategic goals. The ideal reserve level varies based on numerous factors, including:

• Your industry niche
• Operating expenses
• Current debt levels
• Seasonal revenue patterns and long-term revenue trends
• Number of employees
• Other business-specific variables

Setting aside enough to cover operating expenses for three to six months is a good rule of thumb. Establish clear rules about when to draw down these funds and closely monitor cash flow to be sure reserves are adequate to meet expenses over the targeted time period.

4.     Optimizing Accounts Receivable Strategy

A strong accounts receivable (AR) strategy can play a big role in liquidity management and offer opportunities for improving cash flow. Tracking late payments and following up promptly with customers helps prevent uncollectable debt. Ensuring visibility into current receivables is important too; up-to-date information lets you know what to expect so you can fine-tune financial decision-making and expense management. Other best practices for a robust AR collections strategy include:

• Sending prompt, detailed invoices with clear payment terms
• Setting and enforcing penalties as a deterrent for late payments
• Following up regularly on outstanding invoices and offering multiple payment options that make it easy for customers to pay up
• Offering incentives for early payment

Tools for tracking AR and automating invoices and payment reminders can make your processes more efficient and effective, which saves the organization time and money.

5.     Tracking Key Metrics to Monitor Cash Flow

Monitoring certain metrics can improve working capital management by offering insight into the organization’s financial health. Use these metrics to identify early warning signs of cash flow distress, so you can act promptly to mitigate risk:

• Operating cash flow ratio — Start with cash generated by normal business operations and divide by current liabilities. If this ratio drops below 1, find out why and change course as needed.
• Liquidity ratios — These ratios are used to assess a company’s ability to cover its short-term obligations. One example is the current ratio, which starts with current assets and divides by current liabilities.
• Days sales outstanding (DSO) — Higher DSO values often signal suboptimal efficiency in the cash conversion cycle, which can harm cash flow.
• Net cash flow — The difference between incoming and outgoing cash over a specified time period can indicate overall financial health and sustainability.

Consider establishing dashboards or automated reporting systems to make continuous monitoring a part of your everyday business activity without posing additional time demands.

6.     Planning for Contingencies and Mitigating Risk

In times of uncertainty, planning for worst-case scenarios becomes even more critical and limits their potential to create long-term damage. Your scenario planning should include contingencies for both short-term liquidity issues and long-term financial stability.

• Are lines of credit in place for quick access when cash reserves don’t meet demand?
• Which assets can you quickly convert to boost liquidity?
• To what degree could you reasonably accelerate the cash conversion cycle?
• Could insurance products limit excessive cash flow risk in a crisis?
• Is pausing or extending payments on existing debt a possibility?
• How prepared is the organization to obtain cash infusions through private equity or other channels?
• What expenses can be cut if necessary (line of business, staff reduction, etc.)?

Brainstorm broadly, then integrate situation-specific cash flow risk mitigation strategies into your overall approach to business risk management.

Boost Financial Stability in an Unstable World

Don’t let an unstable economic environment threaten what you’ve worked hard to achieve. Assess your current cash flow health and implement these business cash flow tips to safeguard your organization against uncertainty. Be knowledgeable and agile. Your CRI advisor can help with real-time accounting, dashboards with KPIs, budgeting, forecasting, and more. Reach out today and let us show you more ways to protect and nurture what you’ve built, through every economic climate.