Cash Flow: Are You Missing This Simple Trick to Improve It?

Every business leader wants to increase profits. We focus on cutting costs and growing sales to make the Profit & Loss (P&L) statement look better.

But there's another way to make your company financially stronger that many people overlook. It's not about how much money you make, but about how you manage the cash you have.

Let's break down the two approaches to financial health:

1. Cutting Costs: Making More Money (P&L Focus)

This is the most common strategy. You focus on reducing expenses to increase your profit margin.

• Think of it as: Getting a raise at your job. Your income goes up, which is great.
• Examples:
  • Negotiating a lower price with a supplier.
  • Reducing your marketing budget.
  • Finding a cheaper way to ship your products.

2. Managing Cash: Making Your Money Work Harder (Balance Sheet Focus)

This is a more advanced strategy. It's about improving your cash flow by managing when money comes in and when it goes out. A key way to do this is by taking longer to pay your suppliers (this is called "extending your Days Payable Outstanding" or DPO).

• Think of it as: Moving your paycheck from a no-interest checking account to a high-yield savings account. You didn't earn any more money, but the money you have is now working harder for you.
• Examples:
  • Changing a vendor's payment terms from "Net 30" (you pay in 30 days) to "Net 60."
  • Standardizing all new vendor contracts to "Net 75."
  • This keeps cash in your bank account for an extra 30-45 days, which you can use for other things.

Why Does Managing Cash Matter?

Focusing only on cutting costs means you're missing a huge opportunity:

• Poor Liquidity: Even profitable companies can fail if they run out of cash. Managing your payables gives you a bigger cash cushion.
• Missed Opportunities: Having extra cash on hand allows you to invest in growth or take advantage of unexpected opportunities without needing to borrow money.
• Unnecessary Borrowing: Many companies borrow money for short-term needs when they could have generated that cash themselves by managing their payables better.

You Can't Manage What You Can't Measure

The reason most companies don't do this well is that they have no idea what their payment terms are across their thousands of vendors. The data is buried. To do this right, you need to:

• Have a clear picture of your current payment cycles for all suppliers.
• Identify which vendors have non-standard or early payment terms.
• Get a prioritized list of vendors to contact for renegotiation.

This requires a system that can analyze your payment history and surface these insights for you. Once you know who to talk to, you can start making your cash work harder and build a much stronger, more resilient business.