SAP BrandVoice: How Midsize Businesses Can Avoid The Cash-Flow Crunch – Today And Tomorrow (2024)

By Christian Mnich, Vice President and Head of Solution Management, Treasury and Working Capital Management, SAP

Finance leaders from midsize businesses are known for keeping a watchful eye on nuanced signals and indicators of potential risks ahead. However, recent research from Oxford Economics found that approximately half of finance executives from midsize businesses cite risk management (54%) and spend visibility (45%) as top challenges for their function.*

In many ways, COVID-19 presented a perfect storm of cash-flow issues in a matter of days. Economic detraction fueled by government pressure to close nonessential brick-and-mortar stores and office facilities. Lost revenue due to interrupted manufacturing operations and overwhelmed supply chains. Even credit risk exposure is rising as liquidity constraints emerge, once-successful hedging strategies fail, access to working capital tightens, and customer accounts become riskier.

If we think about it, this pandemic has magnified the importance of incorporating cash-flow management as an integral part of a midsize company’s strategic plan – no matter the economic condition

A three-pronged framework for improving cash-flow management

Transparency is critical, especially in the context of cash-flow management. With real-time, reliable financial information and transparency, finance leaders can earn the trust of business leaders, as well as those impacted by their decisions.

Financial reporting may not be the first item on finance leaders’ agenda during a pandemic. But when supported by an integrated treasury system, it is the foundation of three critical steps that midsize businesses should take to secure their cash flow.

1. Ensure continuity of finance operations and workforce

Whether finance employees are working remotely or in the office, the organizations must run continuously without any gaps or broken connections in terms of processes, information, and communication. For example, financial systems should be able to support mission-critical activities – such as urgent payments, cash transfers, and trade management – whether the employees are processing them in the office or from a remote location.

Creating a task force, in which every business area is represented, can also be helpful to identify and plan for potential risk factors based on shared data. Blending data insight with guidance gives finance leaders a real-world view of the business, so it can identify liquidity impact areas and short-term funding requirements across the business.

2. Manage liquidity proactively

Through times of volatility or steady growth, knowing the company’s financial status is critical. Daily reports on key figures – such as daily cash position; cash-flow forecasting; and structure of free cash flow, working capital, and debt – enables finance teams to roll out liquidity planning for at least 12 weeks.

If this kind of reporting is not already in place, financial leaders should consider implementing tools that provide a combination of visibility and predictive analytics. Doing so provides the ability to assess multiple scenarios based on consolidated, group-wide information on cash balances and forecasts in all relevant currencies.

For example, businesses applying for a short-term funding or government program can quickly provide its current financial status, cash position, and 12 weeks of liquidity forecasting. The pros and cons leveraging supply chain financing programs, extended credit lines, or renegotiated payment terms can be also weighed with confidence. Plus, new ways to leverage trapped cash and restructure reverse factoring can be uncovered.

3. Balance risk with opportunity

Analyzing potential scenarios enables finance leaders to evaluate the potential impact of risks and implement prudent strategies to enhance competitive advantage. Plus, they can also fine-tune product and capacity plans by rethinking the implications of commodity risk and monitoring external markets.

Tapping into insights from cash-flow planning analysis, finance teams can adjust their hedging strategies to address a new normal by:

  • Addressing foreign exchange risks
  • Shifting limit management practices for ad hoc tasks
  • Mitigating credit risk within the supply chain
  • Reshaping the funding strategy with extended credit lines and new sources of liquidity
  • Adjusting the ongoing operating model and update the existing business continuity plan

Respond to the immediate challenge and get ready for what’s next

Whether running in good financial shape, struggling for profitability, or facing low cash reserves, all midsize businesses can become vulnerable to cash-flow instability at any moment. It doesn’t have to take an event so drastic as a global pandemic to experience it.

So how do high-performing finance leaders help their business navigate through times of volatility and financial opportunity? It’s all comes down to a foundation of timely, meaningful, and predictive insight and guidance on the potential implications on the business’s financial status, performance, and viability.

For further exploration on how financial managers can navigate disruption today while planning for tomorrow, we invite you to join our Webinar, “Weather Financial Uncertainty with Strength and Resilience.”

SAP BrandVoice: How Midsize Businesses Can Avoid The Cash-Flow Crunch – Today And Tomorrow (2024)

FAQs

How to avoid cash crunch? ›

Seven Tips To Avoid a Cash Crunch
  1. Step1 Realize Cash is King. ...
  2. Step 2 Understand Your Business Type. ...
  3. Step 3 Keep Unwanted Spending at Bay. ...
  4. Step 4 Improve cash flow into the organization. ...
  5. Step 5 Diversifying the sources of income. ...
  6. Step6 Maintaining a corpus fund. ...
  7. Step7 Opting for small finance loans.

What steps can a small business owner take to avoid the cash crunch? ›

Here are some ways to stay on top of your cash flow:
  • Forecast and monitor cash flow needs regularly. ...
  • Improve your accounts receivable process. ...
  • Make use of short-term financing options. ...
  • Ensure profitability in your business. ...
  • Reduce unnecessary expenses.
Mar 21, 2023

What is a cash flow crunch? ›

A cash crunch means a business doesn't have enough money to keep up with operations and needs to change its non-liquid assets into cash. This can mean a lack of funds to buy materials or pay staff and suppliers.

How to solve cash flow problems in a business? ›

Today, it's more important than ever to find solutions to cash flow problem and safeguard your money in order to protect your company growth.
  1. Make regular cash flow forecasts.
  2. Analyse your customers' creditworthiness.
  3. Manage unpaid invoices to limit bad debts.
  4. Get ahead of customer insolvency.

How do you stop crunch time? ›

To avoid crunch time, try to set realistic deadlines, plan ahead, and manage expectations. Setting realistic deadlines is essential for avoiding crunch time. By planning ahead and accounting for unexpected delays and difficulties, you can set achievable goals that prevent a last-minute scramble to complete tasks.

What are some areas that could cause a cash flow crunch? ›

define some areas that could cause a cash flow crunch. cash flow crunch could be caused by improper inventory management, fraud or. embezzlement, excessive payroll, or higher than profit distributions paid to the owner(s).

What are two things a business can do to reduce cash flow problems? ›

13 Tips to Solve Cash Flow Problems
  • Use a Monthly Business Budget.
  • Access a Line of Credit.
  • Invoice Promptly to Reduce Days Sales Outstanding.
  • Stretch Out Payables.
  • Reduce Expenses.
  • Raise Prices.
  • Upsell and Cross-sell.
  • Accept Credit Cards.
Mar 4, 2021

What is one action a business owner could take to improve their cash flow? ›

Encourage early payments, while discouraging late payments

You can try offering your customers a cash discount as an incentive to pay early. This is a tactic that often encourages your customers to pay you early on, which will effectively improve your cash inflows.

How do large companies protect their cash? ›

Key Takeaways. Companies most often keep their cash in commercial bank accounts or in low-risk money market funds. These items will show up on a firm's balance sheet as 'cash and cash equivalents'.

What are the three cash flow activities? ›

The cash flow statement is broken down into three categories: operating activities, investment activities, and financing activities.

What are the three types of cash flow? ›

Question: What are the three types of cash flows presented on the statement of cash flows? Answer: Cash flows are classified as operating, investing, or financing activities on the statement of cash flows, depending on the nature of the transaction.

What are the three main causes of cash flow problems? ›

The main causes of cash flow problems are:
  • Low profits or (worse) losses.
  • Over-investment in capacity.
  • Too much stock.
  • Allowing customers too much credit.
  • Overtrading.
  • Unexpected changes.
  • Seasonal demand.
Mar 22, 2021

What are the five main causes of cash flow problems? ›

5 Biggest Causes of Cash Flow Problems
  • Avoiding Emergency Funds. Businesses — like individuals — need to be prepared for the unexpected. ...
  • Not Creating a Budget. ...
  • Receiving Late Customer Payments. ...
  • Uncontrolled Growth. ...
  • Not Paying Yourself a Salary.
May 3, 2023

How can a business improve cash flow? ›

9 ways to improve cash flow
  1. Start with good cash flow forecasting.
  2. Plan for different scenarios and understand the challenges of your industry.
  3. Consider your one-day cash flow value.
  4. Provide cash flow training for your team.
  5. Communicate effectively within your business.
  6. Make sure you get paid promptly.
  7. Manage with oversight.

What is the safest way to stash cash? ›

It is better to keep your money in a bank or other financial institution, insured and secure. This is especially important if you have large amounts of money.”

How do you solve cash shortage? ›

There are a few ways to solve a cash flow shortage. One way is to increase revenue. This can be done by increasing prices, finding new customers, or selling more products. Another way to solve a cash flow shortage is to decrease expenses.

What reduces cash balance but not profit? ›

#4 Repaying a Loan

That can decrease your cash account substantially. However, accounting guidelines only allow the interest from the loan to be deducted as an expense to deduct when calculating profits. Therefore, the principal payment lowers the cash account but does not affect profits.

How do you keep cash safely? ›

Where to safely keep cash at home. Just like any other piece of paper, cash can get lost, wet or burned. Consider buying a fireproof and waterproof safe for your home. It's also useful for storing other valuables in your home such as jewelry and important personal documents.

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