Managing Cash Flow During Business Expansion

As a business owner, you've steered your company to success, and you've decided it's time to expand. Now, the question is: How can you keep cash flow stable along the way?

Whether you're looking to add equipment, branch out into new markets or open a new location, there are always additional costs associated with business expansion, underscoring the importance of managing cash flow.

Cash flow is key to growing a business

Strong cash flow management is essential at every stage, but becomes even more critical during business expansion. The fact is many entrepreneurs will experience increased cash outlays as they explore how to grow their business—even if they're funding that growth with a business expansion loan. Over time, new revenue generated from this growth should cover extra costs. But in the short term, you'll need to rely on operating cash to cover your expenses.

Looking for ways to optimize your cash flow should be one of your first steps in developing a growth strategy. It's also important to consider how the current business and economic climate might affect both your cash flow and your business expansion plans.

According to Matt Ribbens, Senior Director of Treasury Product Payments at First Citizens, your cash flow may be more affected by interest rates now versus a few years ago. "We're in a rate environment where managing cash is even more critical," he says. "Days payable outstanding, days sales outstanding and inventory turn are things that, if managed more closely, may allow you to free up some capital in the process."

Accelerating cash flow

When you're looking into growth strategies, talking to a banker about cash management tools that can help you accelerate cash flow is a great first step. Ribbens explains that banks have numerous ways to help business owners optimize their operating cycle to better manage cash flow. These include products that may help you accelerate receivables and create more flexibility in meeting short- and long-term obligations.

While your banker's recommendations may vary based on the size and nature of your business, these tools can help you streamline payment processing and accelerate access to cash as you work to grow your business.

Merchant services

There are many options for payment processing—from online payment services like PayPal to third-party processors. However, rather than attempting to reconcile payments across multiple platforms, consider consolidating these services through your bank's merchant services team. This can make it easier to view transactions in real time, analyze cash flow and identify potential shortfalls, which can be especially helpful as your cash outlays increase during periods of business expansion.

Digitized receivables

When it's more convenient to make payments to your business, your customers are more likely to pay on time. An electronic bill presentment and payment system enhances the customer experience by allowing them to receive digital invoices and pay bills online. Allowing your customers to pay via credit card or send ACH payments helps you get your money faster while also allowing you to reduce your paper, printing and mailing costs.

Lockbox services

With a lockbox service, you direct customers to send their payments to a designated address where the bank collects and processes the payments on behalf of your business. There are many benefits to using a lockbox—from reducing in-house processing costs to offering faster turnarounds. Ribbens explains that a lockbox service can be a particularly good option for businesses that receive a high volume of checks.

Remote deposit capture

Remote deposit capture may also help you get funds into your account more quickly. This service enables you to make deposits from your office by using a desktop scanner to capture check images. In addition to improving deposit time, this method also enhances security and accuracy.

Taking a strategic approach to payables

Once you have a solution for expediting your inputs, you'll need to take a prudent approach to deploying that cash efficiently. After all, the longer you're able to hold on to cash, the more time it has to earn interest in your bank account.

Ribbens says a company may obtain benefits from better managing its payables in the following ways.

Keep cash on hand as long as possible

Paying vendors on time is essential, but paying too early may unintentionally impact your cash flow. Companies that wish to keep cash on hand longer may opt to send payments using a technology like ACH payments, which can offer same-day settlement. This allows business owners to keep their cash on hand for longer.

"If you negotiated an invoice to be a 60-day payment, you could pay at night on the 60th day and technically be within the bounds of your negotiated terms," Ribbens says. "You'll earn additional interest on your money if you wait to pay until the latest possible moment."

Or pay early—if there's a benefit

While keeping cash on hand longer is often a smart approach—particularly during periods of business expansion—Ribbens also urges businesses to keep an eye out for vendor discounts. It's not uncommon for suppliers to offer discounts for paying invoices in full within a designated timeframe. After all, for a large payment of $100,000, even just a 1% discount translates to a business savings of $1,000.

The bottom line

No matter the size of your company, continued success often depends on growth. "I think every business should be thinking about growth," Ribbens says. "Relative to what their market looks like and what the competition looks like, even a startup shouldn't be satisfied with the first deal. They should always be looking for opportunities to expand."

Taking steps to optimize your business operating cycle and better manage your cash flow may help you fund that growth—and ensure that it's sustainable.