Project Description

Business man in hallway leaning against windowed wall contemplating while looking at phone

Financial shocks reverberate and test the resilience of every business, from local shops to the largest corporations. When shockwaves shake your financial foundation, cash can act as a stabilizer. To make sure you have enough cash to survive, you may want to reevaluate your accounts receivable, accounts payable, and operational processes and practices.

Start the AR clock early

The cash flow clock starts when invoices are received by your customers. So, accounts receivable needs to get invoices out as soon as possible. With large-dollar sales, you may want to send invoices after the goods ship but before they arrive. Use electronic invoicing or e-bill payment and presentment solutions to eliminate mail float and facilitate tracking.

Recognize that some of your customers may have cash flow issues. Identify those who are late in paying and, if you value their business, negotiate terms that will help them, such as discounts for on-time payment. Reassess the credit worthiness of customers who are chronically late. You may need to require them to prepay. To further accelerate cash flow, look to your best, most credit-worthy customers. By offering them steeper-than-usual discounts – such as 3%/5 – you may land on their list of priority payees.

Pace the AP outgo

To keep more cash on hand, it may be tempting to pay late. But you don’t want to damage vendor relationships by getting a reputation as a slow payer. Make it a goal to pay invoices when they’re due, just not before.

Many companies receive an invoice and cut the check or send an ACH in the next payment run, even when terms call for payment in 30 days or more. You’ve negotiated these terms with your vendors. Now is the time to adhere to them. Consider putting a “do not pay until due” rule in your AP system.

In a cash crisis, you may need to ask your vendors to grant you longer terms and align your purchases and payments with mission critical needs.

Insulate operations

The typical cash management recommendation is to have cash reserves on hand to support your operations for three to six monthsi, 45-days at a minimum. A working capital line of credit with your bank is a repository for cash when you need it. You can calculate your average monthly expenses and draw down your line to cover them. If you don’t have an established line of credit, talk to your bank to see if you can arrange one.

Rest assured there will be more financial shocks in the future – whether recessions, pandemics, or natural disasters. Now is the time to strengthen your company’s financial systems. In-house designed and built systems are often configured for use only on specific computers. For business continuity planning purposes, you may want to investigate replacing these with cloud-based ERP and accounting platforms that will allow you and your staff to work remotely.

Having enough cash on hand can help you face most any financial shock. You may not be able to do business as usual, but you will be able to do business. And that’s what counts.

i“How much cash should a business have on hand?”, Microsoft 365 Team, October 15, 2019, https://www.microsoft.com/en-us/microsoft-365/growth-center/resources/how-much-cash-should-a-business-have-on-hand

“Cash-Flow Management: How Much Cash Should You Keep In Your Business?” by Hal Shelton, American Express, October 12, 2018, https://www.americanexpress.com/en-us/business/trends-and-insights/articles/cash-flow-management-how-much-cash-should-you-keep-in-your-business

“How Much Cash on Hand Is Too Much? And What Should I Do With It?” by Joe Worth, Entrepreneur, January 22, 2014, https://www.entrepreneur.com/article/230204

For more information, contact your Wells Fargo treasury management representative or fill out the Contact Us form on this site.