01/04/2015
By Alan Gillies, Sales VP, American Express Global Corporate Payments UK
Cash flow management remains a key way for businesses to maximise profits and efficiency, and there are a number of approaches that businesses can employ to optimise their working capital.
Firstly, it can be tempting for companies to become over-reliant on a single source of credit. Making simple operational changes such as using additional short-term financial resources to optimise liquidity can significantly ease cash flow pressures and help to sustain ongoing activities. For example, companies can defer payment by using third party payment providers to pay suppliers on a company’s behalf. Paying suppliers quickly also helps to strengthen company-supplier relationships. Similarly, although traditionally viewed as tools for employee expenses today charge cards are increasingly being used to manage a company’s spend on operating costs such as raw materials and manufacturing costs.
Having good cash flow management allows companies to easily identify any areas with inconsistent or excessive costs, and using this information enables them to negotiate better rates with suppliers going forward, which is particularly beneficial as businesses look to grow by reducing existing expenditure.
A lack of visibility when it comes to expenditure and upcoming bills makes managing cash flow a huge challenge. By creating official travel and entertainment expense policies, businesses can specify preferred suppliers. This ensures consistency across all travel arrangements.
In addition, companies can generate a sense of employee accountability by validating expense claims on an item-by-item basis, after the claim has been submitted by the employee. Counter-intuitively, this may prompt the employee to consider whether a particular expense is necessary – rather than encouraging them to make the most of a pre-approved allowance for a particular expense.
By improving visibility of outgoings, businesses can gain a better overview of all expenditure, as well as a greater understanding of potential cash pressures in the future. Expense management tools allow businesses to track trends, such as potential over-expenditure or excessive ordering. Having accurate information management systems and forecasting in place ultimately leads to tighter financial control resulting, hopefully, in more opportunities for investment and growth.
It is critical that companies develop meaningful key performance indicators to test the effectiveness of their working capital management strategy. By doing so, companies will be in a far stronger position to free up cash for investment, avoid overtrading - that is, taking on more business than can be supported by existing funds - and gain a broader competitive advantage.
