Cash flow and liquidity are two metrics that all business owners and finance professionals are familiar with.

While each one provides different insights into the financial health of a business, they’re closely linked. Together they’re strong indicators of a business’s ability to turn a profit — hence why they’re particularly important to investors and C-level executives.

Unfortunately, the current state of the economy has made it more difficult to maintain positive cash flow and a good level of cash liquidity. There are all sorts of strategies businesses can use to increase both of these metrics. But often it's the simplest solutions that are the most effective.

In this article, we’ll discuss a few simple yet effective ways that CFOs and finance teams can increase cash flow and boost liquidity, without making drastic strategic or budgetary changes.

Balancing cash flow and liquidity

Before we get into the tips, let’s quickly explain the potential difficulties finance teams face when trying to balance cash flow and liquidity.

Where cash flow summarises is the amount of money coming into and going out of a business, often calculated as a net value, liquidity is the readily available cash reserves that business has to pay off its short term obligations.

The liquidity of different assets ranges significantly, from cash (the most liquid) to things like property and other material assets, which are much less liquid. These less liquid assets can still be converted into cash, it’s just a longer, less efficient process.

Businesses need sufficient cash flow to provide liquidity to cover their short term obligations. But, at the same time, they also have to invest in other less liquid assets (like stock) in order to maintain operations and pursue growth.

A big part of this is understanding timing and predicting fluctuations in incoming and outgoing cash flows, while preparing for unexpected situations with adequate liquidity at all times. 

While balancing and optimising cash flow against liquidity can be difficult, it’s best to start with the basics.

Tips to improve cash flow

1. Extend payables, streamline receivables

Improving cash flow is all about increasing the amount of money coming into your business, and decreasing the amount of money leaving it. One way that businesses can do this in the short term is by slowing down the rate at which cash leaves your business, and speeding up the rate at which it enters.

In practical terms this means negotiating more favourable payment terms with your suppliers and service providers wherever possible. For example, moving from two week to four week payment timeframes gives an additional two weeks before cash leaves the business. But getting more favourable payment terms doesn’t just mean paying later. Alternatively, you may want to agree on an early payment discount which would help you increase cash flow in the longer term.

On the other side of the equation, encouraging quick payment by customers and streamlining your accounts receivable process will help you speed up incoming cash flow. Of course, in both of these examples, maintaining a good relationship with suppliers and customers is essential, so you shouldn't push payment terms too far.

2. Automate financial processes

Automation is one of the most effective ways to streamline your receivables process. But it’s also a great way to save money across your business and reduce your outgoing cash flow.

Automating internal financial processes, like expense approvals, expense reporting, and invoice processing can greatly reduce the amount of time your finance team has to spend on menial, repetitive tasks. This directly translates into increased productivity by allowing your teams to spend time on tasks that add more value to your business.

3. Monitor and reduce costs/expenses

Anything you can do to reduce indirect costs and expenses will reduce the amount of money leaving your business. As we explained in our recent white paper — Indirect costs: Optimising ad budgets in a downturn — digital advertising is one of the biggest sources of indirect spending for companies. As a result, it's a big focus for businesses that are looking to reduce their outgoing cash flow.

There are number of different ways you can stay on top of indirect costs and expenses like digital ads (which you'll find in the white paper). But it mainly comes down to being able to accurately monitor outgoing cash flow, and capitalise on opportunities to optimise how you pay for your expenses. This may be reducing duplicate spend, or switching providers when more cost effective alternatives arise.

Tips to increase liquidity

1. Optimise pricing

Price optimisation allows businesses to directly alter their incoming cash flow. However, it's not as simple as raising prices. It's a careful balancing act between increasing revenue and not scaring off customers. A large part of pricing optimisation involves increasing or decreasing prices in line with demand, particularly seasonal fluctuations. Price optimisation also plays an important role in customer acquisition through special introductory promotions, etc. Whatever your specific goal is, investing seriously in price optimisation can significantly increase your ability to bring in more more cash when needed.

2. Inventory management

On the other side of the coin, inventory management strategies can dictate liquidity by increasing or decreasing the amount of cash that's invested in inventory/stock at any given time. Businesses may invest a lot of cash to buy inventory in bulk in order to take advantage of bulk discounts or temporary increases in available cash. But this be damaging further down the line if sales dwindle or cash becomes less readily available.

Alternatively, some businesses choose to adopt a 'just-in-time' approach to stock control. This strategy aims to acquire the minimum amount of inventory or raw materials to meet demand at any given time. Just-in-time stock control can help save money in the short term because it allows businesses to keep more cash in reserve.

However, if supply chains are disrupted or demand increases unexpectedly, this approach can have serious negative results. Again, a flexible approach which adapts to current circumstances is best for maintaining liquidity over a longer period of time.

3. Make use of credit

Finally, credit can be an effective way to increase liquidity. Many businesses opt to pay for their indirect and monthly recurring business costs using corporate credit cards because they can pay off their balance at a later date (usually at the end of the month). Even deferring payment until the end of the month can provide a big boost to mid-month liquidity.

Where credit cards are useful for increasing liquidity in the short-to-medium term, bank loans and other forms of credit are better if your business is looking to increase liquidity in the longer term. However, credit does come with risks, and can end up costing significantly more if your business is unable to make repayments.

In conclusion, each of the tips we've outlined have the potential to alter how your business manages its cash. Even if you're using some of these techniques already, it helps to start with the basics and not unnecessarily complicate your approach to cash management. Stay tuned for our budget optimisation checklist that will be coming out next week!