Opinion: Here’s how to protect business cash flow

Justin Butler

Although there have been conflicting opinions and significant back and forth when it comes to the economy and whether we are headed for a recession, one thing remains consistent: Managing cash flow and liquidity are top priorities in today’s business world. In fact, according to the 2023 Liquidity Survey Report from the Association for Financial Professionals, finance executives rank protecting cash, at 63%, and liquidity, 33%, as their top primary investment objectives this year. And, according to the National Federation of Independent Business’ Small Business Optimism Index from June, 25% of business owners reported inflation was the single most important problem in operating.

Key actions
Fortunately, there are strategic ways business owners can financially prepare for an economic downturn that will help them manage through inflationary pressures. A few key actions businesses can take to positively position them for optimal cash flow include:

1. Assess current cash and projected earnings. Your cash flow projections should be able to tell you the cash you have right now, as well as provide a projection for what your cash will likely look like in six months based on current and future income sources. Work with a banker or financial adviser who understands both sides of the balance sheet as they can help you determine how much cash you need to run your business efficiently and effectively.
2. Maintain cash reserves and liquidity. In today’s economy, defending your cash may be just as important as generating it. While it may be necessary to take on new debt for long-term plans, assess whether your current cash reserves can support your desired investments or whether it is better to wait. Reviewing debt burden for restructuring or consolidation options is another way to maintain cash flow. Current inventory, industry and economic environments, supply and demand, and consumer sentiment are just a few of the items that may affect your business. Consult with your financial advisers to discuss these factors to help determine your ideal cash position and opportunities.
3. Evaluate expenses. No one likes budget cuts, but nearly all businesses need to implement them at some point. Clearly identify, plan and manage your fixed and variable expenses. Then review to determine if all expenses are necessary. Is travel imperative to your business, or can you pare it back? Where can you gain efficiencies in processes or operating costs? A calculated, strategic approach to analyzing – and potentially reducing – your budget is imperative to long-term success.
4. Explore new ways to generate cash. Once you have a handle on your current business cash flow, you can focus on new ways to generate more income and cash flow. Leveraging technology can create efficiencies in workflow that free up employees to focus on revenue-generating activities. Part of a well-rounded cash management approach also includes a healthy mix of corporate card programs, payables and other solutions. For some businesses, utilizing tools such as rate swaps, floating rate debt and certificates of deposit may also generate additional cash flow. For others, it might be leveraging high-yield savings or sweep accounts to generate income. There are many ways to generate cash flow, so take the time to find creative solutions and explore options that work for your business.

Unpredictable nature
While no one can predict exactly when the economy will shift or to what degree, protecting cash flow and preparing for different scenarios with your financial advisers are proactive ways to set your business up for success in today’s changing environment.

Justin Butler is market president and commercial team lead for UMB Bank in Springfield. He can be reached at justin.butler@umb.com.