Cash flow is more important than ever. Even when markets are down, taxes will come due, loans will need to be repaid, and investments will be required to keep your organization on sound footing.

While a positive cash flow is not the only factor that influences success, it’s a good indicator that a business is prepared to manage uncertainty. Short-term fixes like tax deferrals, interest-free loans, and stimulus payments can help, but these fixes can also breed reluctance to adapt to new norms. Business leaders can follow a few best practices to effectively manage cash flows and better prepare their companies for unknowns.

Clean Up Your Financials

Keeping clean financials is likely something you already value, but it’s especially important for cash management. When you keep your books tidy and up-to-date, you and your financial advisor can pinpoint the areas where you’re spending too much and can more easily find new opportunities to generate cash.

Even if cleaning up your books doesn’t directly generate cash, it will help with other aspects of cash planning. With clean books you can more comfortably rely on your projections, prepare accurate budgets, more easily negotiate your loans, prepare accurate job cost reports, and shift directions quickly as customer demands change.

When cleaning up your financials, some places to start are:

Receivables

  • Write off receivables that are uncollectible and follow up on those that are past due.

Assets

  • Remove retired assets from your books and make sure remaining values are accurate.

Inventory

  • Determine whether inventory needs to be written off and discuss the best method for valuing your inventory going forward.

Expenses

  • Review recurring costs — such as insurance policies, accounting software, and subscriptions — and remove those that no longer help you meet your goals.

Shorten Your Cash Conversion Cycle

Your cash conversion cycle is the time it takes your company to convert an investment into cash. When you outline the cash cycles for each of your revenue streams, you can see where your lag times are. A few ways to speed up your cash conversion cycle are:

Invoice sooner or more often.

  • Consider asking for payment up front, or change your contract so you can bill when you meet a certain milestone.

Automate invoicing and collections.

  • Learn your accounting software and use it to your advantage. Most software can automatically generate invoices and facilitate immediate electronic payments.

Incentivize early payments.

  • Offer discounts to encourage your customers to pay their bills early.

Penalize late payments.

  • Even applying a nominal interest charge for late payments may be enough to get your customers to pay you timely.

Follow up on unpaid invoices.

  • Build better in-house protocols so you follow up promptly when invoices are past due. Use the automated reminder features of your billing software.

Update billing procedures.

  • Employ new procedures that shorten the time between when projects are finished and when the invoice gets sent out, or the time between when invoices are created and when they are approved.

These small tasks are easy to delegate, and by asking for help from your department leaders, you may discover other areas where cash gets stalled. Be open to suggestions and ask your workers for help making the changes.

Renegotiate Debts or Lease Agreements

If your outstanding loans are at high interest rates, consider refinancing. You can also talk to your bank or lessor and renegotiate your debts in other ways. If you would benefit from lower monthly payments, ask your lessor if you can extend your lease agreement by an additional year or two to compensate. Banks, lenders, and lessors will likely be willing to negotiate if the adjustments ensure you can continue to work toward a payoff. Some debt negotiations can trigger cancellation of debt income, so work with your tax advisor before signing new documents.

Watch the Tax Landscape

The U.S. tax law has been overhauled in recent years, and there may be cash saving opportunities you or your business have not yet taken advantage of. The Tax Cuts and Jobs Act (TCJA), passed at the end of 2017, has a few provisions that expire at the end of 2025, including:

Bonus depreciation

  • 100% bonus depreciation is available through the year 2022 and then phases out until it is gone in 2026.

Child tax credit

  • The TCJA doubled the child tax credit from $1,000 to $2,000 per qualifying child.

Standard deduction

  • The TCJA also nearly doubled the standard deduction. Not only can this save tax dollars, but many taxpayers can avoid the administrative burden of itemizing their deductions.

Alternative minimum tax

  • The alternative minimum tax (AMT) exemption increased by about 50%, allowing many taxpayers to avoid the AMT.

Since the TCJA was passed, lawmakers have introduced new measures to help taxpayers navigate the economic downturn. For example, individuals facing coronavirus-related financial hardships can now withdraw up to $100,000 from their retirement accounts without subjecting themselves to an early withdrawal penalty. And if they repay those amounts within three years, the withdrawal will also be free from income taxes. Talk to your tax advisor to see if there are other money-saving opportunities you’ve missed in the Tax Code.

Create a Budget and Stick to It

Budgets can (and should) change when your assumptions change, but a budget is a budget for a reason. Use it and stick to it.

As you make your budget, project out your cash needs as far as you reasonably can. This can help you prepare for what’s coming. For example, if you think you’ll have trouble making quarterly estimated tax payments, consider remitting tax payments every month instead of waiting until the end of the quarter.

And make sure to ask your accounting and finance team to help prepare and monitor the budget. Those in the trenches have a more intimate understanding of each line item and can flag outliers for you to review when comparing your budget to actual performance.

Adapting to Uncertainty

The economic repercussions of the COVID-19 outbreak are still emerging, so for the time being, business leaders must get comfortable with being uncomfortable. If you want help improving your cash position or have questions about how you can better manage economic uncertainty, contact your CRI advisors today.