Running your business in the COVID-19 era may lead to cash-flow complexities: you may be managing payments from a wider range of customers, rethinking your staffing, changing your facilities, or purchasing new inventory. Any of these activities can affect cash flow.

The key to optimizing your cash flow during changes to your business is a streamlined cash conversion cycle. In other words, less time between purchasing inventory (or investing in a service) and the sales that generates.

These five tips may help you improve cash flow by potentially shortening your cash conversion cycle.

1. Get paid quicker

A cash-flow review starts with examining business receivables, says Philip Campbell, CPA, a financial officer and consultant in Austin, Texas, and author of A Quick Start Guide to Financial Forecasting. Businesses can run into trouble in this area, he notes, when they’re so focused on increasing sales that they’re slow to invoice customers or follow up on collecting overdue payments.

If your receivables cycle is increasing, consider:

  • Accepting payments online. Give customers the ability to pay via your website. Wells Fargo Merchant Services enables you to accept credit and debit card payments by phone, online, or on the go.
  • Automating billing. Use accounting software like QuickBooks® Online or Xero® to automatically send invoices; these tools can sync with your Wells Fargo business account, which can reduce the number of hours you spend collecting and logging receivables.

2. Update your inventory

Many businesses pivoted in 2020, and it can be easy to forget about outdated products languishing in inventory. This trend can take different forms for each industry. For instance, retail stores may have obsolete items on their shelves, service businesses may be stocked with supplies for infrequently used packages, and manufacturers may have old materials still taking up space in the warehouse.

While discarding or selling old inventory at a discount may temporarily hurt gross profit margins, Campbell explains that, in the long run, it’s more important to regain cash tied up in stale merchandise.

To improve your days inventory outstanding, consider:

  • Assessing which products are worth marking down to be quickly sold and which should simply be eliminated.
  • Update your point-of-sale (POS) system to help make discounts easy and automatic.
  • Inventory tracking software, which is often available through POS systems, as well as accounting software, can help you determine discounts, as well as how you might handle inventory going forward.

3. Budget for rebuilding

In addition, cash-flow issues can arise when you need capital for an immediate investment. For instance, a business may need to hire new employees to accommodate a pivot, creating a lag between the hire and new paying customers. Or you might need to shift office spaces to account for changes to your business model or to accommodate social distancing.

Typically, with accounting, capital expenditures don’t show up in an expense period, Campbell explains. But they can still affect cash flow. For example, spending $10,000 on a new piece of equipment doesn’t appear on the company’s income statement but would affect cash flow.

If you can, try to set aside cash in advance toward these types of investments or consider strategically using any available credit.

4. Examine your pay

Owner distributions appear on the balance sheet, rather than the profit and loss statement, so it’s not always apparent if these distributions are out of line with sales and affecting cash flow.

Campbell says if a business’s profits are decreasing, it’s important to rethink owner distributions to preserve the long-term health of the business.

5. Accounts payable

Controlling cash outflow is just as important as expediting cash inflow. While the tendency may be to delay payables as long as possible, it can also be beneficial to make payments immediately, to demonstrate goodwill with suppliers and avoid funds being intentionally or unintentionally redirected.

These tools can help you make sure your days payable outstanding works with broader company goals.

  • Employ electronic payments when possible. This avoids processing delays so you can better maintain control of your outflows and improve record keeping. It can also help prevent fraud associated with paper payments. Wells Fargo offers a number of ways to pay vendors electronically, including Bill Pay and Direct Pay.
  • Issue purchase orders for each project. You can use accounting software to do this; it may help you lock in payment terms upfront and streamline invoice tracking.

Cash flow can be key to feeling in control of your finances, which is even more important in today’s volatile environment. These tips, combined with Wells Fargo products and services, can help you manage your cash flow and focus on the future.

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