1. The Power of the 13-Week Cash Flow: Planning Ahead & Eliminating Surprises

The best way to master your business’s cash flow is to first understand it. One of the most helpful tools for getting in sync with your cash flow is the 13-Week Cash Flow Model. A 13-Week Cash Flow Model tracks all incoming and outgoing cash within your business, down to the day and the dollar. Capital-savvy teams use this model to determine their exact liquid cash balance on any given day and make data-driven decisions on when to spend, when to tighten up, and who on the team is responsible for making that happen.

While setting up your model can be time-consuming at first, don’t let that stop you. As soon you’ve established a rhythm of weekly review, you’ll notice you’re spending less time tackling unforeseen liquidity issues and other cash flow-related fire drills. 

2. Vendor Financing: Turning Vendors into Stakeholders

Your vendors can often be on your best sources of working capital, but only if you know what to look for and what to ask for. The first step is understanding the concept of ‘Net Terms,’ which primarily refers to the number of days the vendor is willing to offer before invoices are due. While not all vendors will extend these terms to new customers, exceptions do exist. 

Net Terms typically vary from Prepayment (requiring payment before goods are shipped) to Net 90 Days (allowing payment up to 90 days after shipment). In some cases, repayment terms can be even longer than 90 days depending on the vendor or your relationship to the vendor. Securing longer Net Terms is often a cheap and overlooked way to finance your inventory until goods are safely stored in your warehouse or even sold. This approach, where vendor payments align with customer purchases, essentially creates a positive working capital cycle that continuously feeds itself.

Your key vendors can be some of your most important stakeholders, and the feeling is often mutual. If you approach them with a reasonable ask, they might meet it. Certain vendors may even allow you to pay invoices past the agreed upon due date during periods when cash might be tight. Regardless, we always recommend establishing a clear line of communication in order for both parties to benefit from this relationship. 

3. Credit Card Utilization: Strategically Extending Payments

When used appropriately, credit cards can offer additional control over your cash flow cycle. You can push payment windows out by 30 – 45 days by strategically placing certain expenses (e.g. ad spend) on your credit card. This comes in handy in an industry with unpredictable cash cycles, or when dealing with Net Payment Terms from vendors.

Additionally, credit cards can serve as a buffer for unexpected expenses or cash flow gaps, acting as a short-term financing solution without the need for a formal debt process. Some credit cards even offer rewards or cash back programs, effectively turning routine business expenses into savings or additional cash flow.

That said, it’s important to be savvy with your corporate cards, ensuring that payments can be managed within the billing cycle to avoid accumulating interest charges. We recommend having a firm grasp of your card’s terms and rates, as well as your business’s liquidity levels before leaning into this approach.

4. Active Accounts Receivable Management: Ensuring Timely Payments

When it comes to maximizing your cash flow, effective Accounts Receivable (A/R) management should be your top priority. An Account Receivable is essentially a customer’s promise to pay you for your product or service. In order to minimize Days Sales Outstanding (DSO), and therefore maximize your liquid cash balance, here are some basic tactics to follow for a more active A/R management approach. 

• Proactive engagement with customers: Ensure that customers receive invoices and any necessary documentation as soon as possible. Find the right contact at your customer and follow up with an email within a week to ensure they have the invoice and any supporting documentation. For companies that have supplier portals, make sure those invoices hit the portal as soon as product is received.
• Drive punctuality with incentives: Offer incentives, such as discounted terms.  For instance, if your typical terms are Net 30, you can often drive early payment by offering a 1% discount.  While this hurts margins, it’s often cheaper than relying on credit card or other types of debt.
• Strengthen communication links: Establish a relationship with your customers’ Accounts Payable (A/P) department and other decision-makers to help streamline the payment process. You’ll also have better luck resolving any discrepancies quickly if you know who to call.

5. Converting Inventory into Cash: Striking the Right Balance

In our experience, inventory has more often than not been the largest strain on a brand’s cash flow. While it may seem counterintuitive — being well stocked and able to meet demand is crucial — there are situations where we misforecast, over-order, or over-stock underperforming SKUs (e.g. incorrect colors, or sizes). 

Ideally, a company should maintain 12 – 16 weeks of inventory on-hand, unless there’s a specific reason for over-stocking such as an upcoming product launch or event. It is when inventory numbers climb beyond that sweet spot that brands start facing the consequences. Whether it be increased carrying costs, product obsolescence due to seasonality or expiration dates, or being forced to sell at a discount, businesses end up paying the price in some way or another. Discounting, while it isn’t the end of the world, can have several negative implications including margin erosion, shifting demand patterns, and conditioning customers to expect lower prices. 

The bottom line is: manage that inventory down. If you find yourself over-inventoried — a common repercussion of recent supply chain disruptions — take the necessary steps to move inventory out of your warehouse and into the hands of your customers. Simultaneously, adjust your future buy downs to prevent perpetuating the issue. 

6. Cutting the Fat: Streamlining & Eliminating Unnecessary Expenses

It may seem obvious, but ‘cutting the fat’ can have a significant impact on cash flow if performed regularly and efficiently. Beyond initial cost-cutting, this practice is an ongoing commitment to a lean financial structure. We’re not saying to adopt a purely frugal outlook, but rather, to regularly analyze each expense and evaluate its contribution to your business’s objectives. This way, you can feel confident that your resources support your growth strategy.

Not sure where to start? Consider canceling your corporate credit cards. While it may feel like a blunt act, you may find that certain recurring expenses don’t really need to be renewed. A more nuanced approach is creating a bottom-up budget and determining annually which initiatives need to get funded and by how much. By building this from the bottom up, each department has the opportunity to reflect on historical spending and make informed decisions about their budget going forward based on ROI.

7. Working Capital Financing: Extending Runway

Our final recommendation — working capital financing — is a tool every business should have in their toolbelt. Among the most versatile funding options is the Asset Based Loan, which is a credit facility backed by the assets of the business, and adjusts based on the underlying collateral. Usually, those assets include Accounts Receivable, Inventory, and Equipment. 

While the first six steps we’ve outlined above can make a significant impact on your cash flow, we know that there’s only so much that’s in your control. This is where your Asset Based Loan comes into play. Structured as a revolving line of credit, these loans are designed to cover cash shortages and short-term cash expenditures such as large production runs, inventory builds, A/R or collection delays, and of course, growth. Another common use case is to put funds toward bridging to an event such as an equity raise or an exit. 

However, not all Asset Based Loans or lenders are created equal. When seeking out the right working capital partner for you, the following considerations are paramount:

• Industry Immersed: Do they understand the nuances of your business or industry? 
• Reputation: Do they maintain a strong reputation amongst investors and brand peers? 
• Flexibility: How willing are they to adjust your loan as your business grows? Are they open to over-advancing funds to help you take on new opportunities? 
• Partnership: Will they pick up the phone when you need them? Are there other ways they can contribute to your business’s growth, such as relevant introductions? 
• Ease of funding: How easy is it to draw from your line of credit? Do they have technology in place to reduce the hassle of ongoing reporting? 

Takeaways

Cash is the lifeblood of any organization and hopefully these tools and tactics help you understand how to make your company’s cash work better for you. Remember that cash flow management is an ongoing process that requires consistency and adaptability. Stay committed to implementing these strategies, monitor your financial performance, and be prepared to adjust your approach as circumstances evolve. With a solid understanding of these principles and a proactive approach to cash flow, your business will be well-equipped to weather financial challenges and seize growth opportunities. 

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