Cash flow crunch avoidance strategies

Crunch: It can be an interesting texture to add to a dish. But when it comes to cash flow, avoiding a crunch is arguably one of the CFO’s biggest responsibilities.

Sometimes even the most dogged finance chiefs end up in situations where the past-due bills are piling up, the company’s receivables are ballooning as customers delay payments, or both.

Regardless of the reason, when liquidity dries up, it can send finance into a panic. “If you’re not watching cash and taking steps to ensure you have enough of it, you are putting your business on shaky ground,” Ram Charan, an advisor to boards and CEOs, wrote in his book, Leading Through Inflation.

Have a process and plan. Preventing a cash flow crunch in the first place seems like an obvious idea, but Mark Zeffiro, managing partner at professional services firm Brooks International, told CFO Brew that without a link between a business’s financial, and operating standards, pricing and predictability can quickly get out of control. 

If the goal is to never have a cash flow crisis, Brooks CEO Lui Damasceno continued, accountability should be “established early on…to make sure that all parties are really aware of the role they play” in ensuring “there is no cash flow crunch ever.”

“Having a preestablished process secures the core set of financial principles, methods, control points, and accountability structure needed to protect cash consistently and effectively,” Zeffiro added.

Can you see it? A major part of establishing a cash process within a business is having clear visibility into not only where that cash sits within the company, but where it’s coming from, too.

Ideally, Zeffiro said, a solid operating plan helps ensure decent cash visibility, but that’s not always the case. Asking questions such as “What is my daily cash? Do I have visibility to that daily cash? Do I understand my operating cash cycles within the business itself?” can help a CFO begin increasing their cash visibility, Zeffiro said.

Asking these questions can help give everyone on the leadership team, not just the CFO, clarity around running the business, he said, “because the CFO is not the only person that’s out there negotiating terms.”

Consider AI for data-gathering. It can be tempting to throw in the towel or rethink existing datasets if they contributed to the crunch in the first place.

But Scott McDermott, CFO of AI finance software maker Esker, told CFO Brew that because finance teams often pull from several different datasets to inform decisions, AI can help make sense of it to deliver cross-functional and business-facing outcomes.

“For us internally, my ability to use what’s known as the MCP protocol, where I’m able to ping [Microsoft] Teams and say, ‘Hey, tell me which customers haven’t paid us, and then generate emails and send off a reminder,’ all of that is helping; it’s this circular reference…that is creating and allowing us to go faster from an information perspective, and also allowing us to collect our cash faster,” McDermott added.

Self-help. Those airline stewards were right: Helping yourself before someone else is a tried and true method, Zeffiro said. First and foremost, getting through a cash crunch is about preserving cash. “That means not relying on others to help yourself.”

CFOs can help themselves first by focusing on what they can control, including choices around current and future investments.

“And then you have to be very clear as to what is and is not critically important to the organization at large to be able to support your customers, because ultimately, if the customer shuts you off, you’re not going to have any cash to worry about in the first place,” Zeffiro added.