From supply chain disruption to a dip in product demand to late customer payments, economic downturns can pose a series of cash-flow challenges. To help your business manage during uncertain times, it may help to consider a strategic approach to strengthening your cash position. This can usually best be done by renegotiating existing agreements and adopting new technologies.

1. Use technology to shorten the invoice-collection cycle

As a first step, consider modernising your payments infrastructure with invoice software. Automated electronic payment solutions eliminate the cumbersome manual processes involved in sending out, following up on and paying paper invoices.

Invoicing software will also allow you to automate the sending of invoices (and payment reminders for those invoices) and to keep track of all your invoices via a dashboard. These features can help minimise bad debt and encourage your customers to pay your invoices more quickly.  

2. Maximise DPOs when possible

The Days Payable Outstanding (DPO) ratio tracks how long it takes your organisation to pay its vendors. By maximising DPOs and paying closer to invoice deadlines, you can maximise working capital. Of course, many of your customers will also be inclined to use this strategy when business is slow, which means you may end up waiting longer to collect on payments you’re owed. Increasing your DPOs can help offset cash-flow problems caused by your customers taking longer than usual to pay.

While extending your DPOs is generally a smart move, you should also think about how your vendors will be impacted. There’s long been considerable disquiet about larger Australian businesses delaying payments to smaller ones. You can create a lot of goodwill – goodwill that may prove useful in a crisis – by paying your more vulnerable vendors as quickly as you can manage.     

Leveraging automated supplier payment solutions, such as digital supplier payment tools, can help extend your DPO while reducing your vendors' Days Sales Outstanding (DSO). By paying your vendors on time through digital supplier payment tools, you can hold on to cash for longer

3. Negotiate supplier terms

Negotiating supplier terms is more important than ever during times of disruption. Some areas to focus on include:

• Extending payment deadlines: Extending payments can allow you to hold on to cash longer and help improve working capital. In the current environment, payments can be a critical negotiating factor. If you are in a strong cash position, you can leverage that for greater purchasing opportunities.
• Finding possible rebates: Cash-hungry vendors may be willing to offer discounts in return for faster payment or to lock in a purchase when their sales are slow.
• Considering volume discounts: You’d need to balance the pro of a bulk-buying markdown against the con of spending more cash upfront. But if you can afford it, now could be the time to stock up on supplies.
• Comparing vendor terms against industry benchmarks: Be sure to regularly compare your vendors’ terms against industry benchmarks. Make sure they are still in line with – or, ideally, more attractive than – those benchmarks. (As economic conditions change, things such as standard payment terms often change as well).

4. Update cash-flow forecasts

Cash-flow forecasting can be a helpful tool in predicting your future financial position. But to get accurate results, your models require reliable data — the assumptions you made about your future incomings and outgoings pre-pandemic are now likely inaccurate.

Revisit your past cash-flow forecasts and see how they've changed based on recent events so you can adjust your assumptions as needed. One option is to consider forecasting and checking results more frequently — you may get a better picture of your position by updating on a monthly or even weekly basis. This may help you catch changes a little earlier so you can more quickly react to cash-flow swings.

5. Revisit your supply chain strategy

Due to interruptions across the supply chain, you might have had to change some of your suppliers. If you haven’t yet, you may well need to soon. Why not take advantage of this to re-evaluate your supply chain from a cash-flow perspective? Lower-cost suppliers usually insist on large orders or more money upfront. While this may have been a good deal in less eventful times, there could be benefits to working with vendors that charge a little more per unit but offer better payment terms or allow smaller orders. Working with local rather than foreign suppliers could also help avoid supply chain disruptions.   

6. Foster a cash-flow culture

Ask your teams to think about how to maximise cash flow when making decisions. Have them take a look at major costs such as inventory, raw materials and rent, as well as seemingly small outgoings that can collectively have a big impact on the bottom line.

Consider providing a framework to encourage your staff to think more about managing cash flows in their day-to-day decisions. Empower them to search for their own ways to maximise cash or reposition spending away from less important areas.

7. Use credit wisely

Unfortunately, you might experience one or more cash-flow crunches during economically turbulent times. You should work out in advance what form of credit will be most useful in such a situation. 

The events of 2020 have turbocharged the digital transformation of many businesses in Australia and around the world. Not only can investing in digital solutions help improve your cash flow, it can also help your finance team to focus on strategic projects. Projects that might just pay off in a big way when the economy picks up.