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Cash Flow Optimization Strategies for Facilitating Growth

The life blood of all companies large and small is cash, but more specifically, the flow of cash. Cash flow into and out of a company are of equal importance to the short and long-term trajectory of a business. Fortunately, there are a number of practical strategies that can be deployed to optimize and enhance cash flow, including the ones we’ll examine below: 1) effectively managing receivables, 2) financial planning and analysis (FP&A), and 3) leverage of existing or new banking relationships.

Effectively Managing Receivables

A common area of focus for most growth-driven companies revolves around top line growth and reduction of expenses, both designed to increase the bottom line in dollar value as well as margin.  The importance of this consideration should not be overlooked, however a key component that typically does not receive the same amount of attention is the timeliness of collections.

The short-term effects of poor collection are inherently known and fairly straightforward, however the long-term effects aren’t simply the accumulation of the short-term effects, but rather a compounding accumulation. While there are obvious advantages to offering credit to customers, there are also circumstances in which aging receivables can place an unnecessary burden on the company. Extending credit opportunities can establish trust and positive working relationships with customers, but in contrast can also lead to strained customer relations and over-leveraged accounts.

It’s critical for a company to keep a careful eye on the amount of credit extended to customers as well as how payment collections are handled. Employing a specific and functional collections policy can help to ensure payments are received in a timely manner and cash flow isn’t negatively impacted. Companies may want to consider reducing their collection period, for example, to limit the number of days/weeks customers have to pay outstanding invoices; this will reduce the gap between when expenses are paid (e.g. salaries, etc.) and customer compensation is received.

Employing a full- or part-time individual whose primary purpose is to ensure timely collection of receivables should not be overlooked. In fact, the potential return on investment for that specific individual or individuals may be one of the highest – if not the highest – within the company.

Financial Planning & Analysis (FP&A)

Arguably the most effective and transparent tool to optimize cash flow is through a financial planning & analysis (FP&A) model, which can provide visibility into the future economics of an organization and help management redirect capital to initiatives that increase the value of the business and net after-tax cash flow.

With transparent information on both current and future financial performance, companies can accomplish a number of critical initiatives, including:

  • Optimizing cash flow by examining margins, working capital needs, capital expenditure planning and dividend planning;
  • Establishing ROI and determining optimal strategies for utilizing the company’s cash flow and working capital; and
  • Projecting working capital balances and changing working capital assumptions related to revenue and expenses.

Within the correct financial planning and analysis framework, companies stand to benefit by gaining insight into the after-tax impact of various business strategies, facilitating optimized cash flow and driving future business initiatives.

Refinancing & Recapitalization

In many cases, it can be advantageous to consider refinancing and/or recapitalization strategies to achieve capital for growth.

Optimizing bank financing begins with getting your financial house in order; bank assessments may include review of annual audits, budget-to-actual monitoring and receivable and inventory reporting, all of which help the bank understand if a company is being operated in the best way to meet a lender’s financial covenants, and ultimately, to enhance borrowing capacities.

A recapitalization can also be an appealing scenario to a business owner interested in creating liquidity without forfeiting a significant ownership stake. In a conventional recapitalization, the owner can achieve capital for growth while simultaneously refinancing the company’s capital structure. There are a number of tax implications to recapitalization, however, so it’s critical to evaluate any potential disadvantages before moving forward.

Other Cash Flow Optimization Strategies to Consider

The aforementioned strategies are certainly far from the only means through which to optimize cash flow and enable growth within an organization. Companies may also want to consider:

  • Entity Structuring. Rethink the company’s entity structure, capitalize on tax incentives and insert more working capital into the business
  • The use of trusts for certain types of businesses in high-income tax states can reduce tax obligations and maximize after-tax cash flows
  • Payment and Procurement Policies. Consider implementing payment and procurement policies to support the ability of the company’s purchasing personnel to negotiate the best terms possible

The MFA Companies® has extensive experience working with growth-driven companies to support their financial goals and providing advisory related to specific cash flow optimization objectives. To speak with someone on our team, please contact us.

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