INFO icon

Important Information about Coronavirus (COVID-19) LEARN MOREBranch Status

OC Register: Top Workplaces 2018, 2019


featured image

Get busy with these 4 tips to improve cash flow to run your business better.

Surely, you’ve heard it many times before: Cash is the lifeblood of your business. Not only do you need to worry about current cash needs, but you need to project for ever-changing circumstances, largely impacted by factors you cannot control, such as economic cycles and competitive threats.

If you’re ready to get serious about the long-term future of your business, and you want your business to survive, there are four tips to improve your cash flow and run your business better.

Coin being deposited in Piggy Bank


  1. Get serious about building a rainy day fund.

    Our parents always told us to put money aside for emergencies. Some of us have done that and many of us haven’t in our personal finances. But if you really want your business to survive for the long haul, building a ‘rainy day fund’ or ‘cash reserve’ is absolutely critical.

    However, extra coin in the piggy bank isn’t just about dealing with rainy days, aka. getting through the next downturn or unexpected disruption, such as losing a top customer. Those are important reasons, but building a strategic cash reserve (or available line of credit that you can afford to pay back) enables you to make timely investments; e.g., introduce a new product, make an acquisition, pursue a new market, etc. And when those opportunities present themselves, timing is always everything; you need to be ready!

    How much? Six months of operating expenses for “defense” – to get through the unexpected events – plus another 6-24+ months of operating expenses for “offense” for when you see a slam-dunk win if you could go after that new category.

Looking through telescope at future forecast


  1. Get good at cash flow forecasting to get more confidence.

    Numerous studies have shown cash flow forecasting and cash mismanagement are among the leading causes of business failure. For most business owners, thinking about the next year or so can seem rather easy to do. Yet, projecting out what will happen to your business over the next five years is much more difficult. Even though the truth often hurts, having a better understanding of your future potential risks will reveal the steps you should take today to mitigate your risks and take advantage of those future opportunities. By assessing the possible ‘what-if’ scenarios, forecasting your financials will give you a lot more confidence.

    Cash flow forecasting is also how you start building that cash reserve. Sure, you have to actually set cash aside (in a separate account), but how will that affect your working capital for running the business? And how long will it take to attain a comfortable cash cushion? This is where cash flow planning is mandatory. Attempting to do your own forecast and financial modeling can feel overwhelming, so you may not want to “try this at home”. But you also don’t have to pay through the nose to get it. Read more about those possibilities below.

    How to Build a Better Forecast
    Learn More

Scissors cutting down debt


  1. Get very active in minimizing receivables.

    As you’re building that cash reserve, you’ll feel in-the-green, which is when many firms get more lackadaisical about managing receivables. Why? Because it can be hard – especially with long-term customers who are “like family to us” – to have that please-pay-your-invoice conversation. And it’s a lot easier emotionally to not have that conversation.

    Receivables can be a handy warning sign of possible trouble ahead. Since your customers can lose track of their payables (quickly), you must be disciplined about watching for any month-to-month increases in receivables that are out of the ordinary. Therefore, even when you’re feeling flush, you must keep your team focused on collections (the really hard conversations). If they’re not already in place, your bank should have the tools necessary to help your team with AP/AR automation, which will help you establish basic processes for invoicing and tracking to maximize cash flow.

Magnet attracting customers


  1. Get busy getting more customers.

    Yes, you have a successful business, but do you know your “customer concentration”? In other words, if your top two or three customers went elsewhere, how much would that affect your top line revenue? For many “successful” companies, that answer is 30-40% or more. Or how much revenue would you lose if just one of your top 5 customers vanished? It’s not unusual for that number to be 10-15%, which means the risk to your cash flow – i.e., the likelihood of reducing your company’s “blood flow” – could be quite high. What would happen if your business lost 10-40% of revenue? With a significant cash reserve in place, that occurrence wouldn’t necessarily put you out of business.

    Reducing customer concentration is usually the hardest of the four tips because it requires your sales team stepping up their game. Marketing and sales strategies are beyond the scope of this post, but keeping your top 5-10 customers at 10-15% of your revenue is ideal. Your larger customers can use their disproportionate negotiating leverage to extend payment schedules or exert downward pricing pressure that results in tighter margins and cash flows. Adding more Clients to your roster is the linchpin to better cash flow.

Where can I get help with Cash Flow Management?

No matter what business you’re in, utilizing a financial modeling tool can help you gain more insight, so you don’t put your business at risk. With a financial model tailored to your company, provided at no cost from Pacific Mercantile Bank, you learn more about your likely cash flow needs and management goals in several ways.

  • Highlight competitive advantages and what makes your company stand out.
  • Find strengths that may give your business more opportunities over the next few years.
  • Pinpoint potential weaknesses or areas of necessary growth and change, allowing you to avoid costly mistakes.

Whether you are working on securing new investors or thinking about the advantages of scaled growth in the coming months and years, sophisticated financial modeling gives you the insight you need to make some of those what-if decisions a bit easier to recognize and plan for over the next five years.

This type of financial analysis isn’t designed to just be something you do. It’s an action plan that gives you strategic steps to apply directly to your operations, immediately shoring up potential cash flow problems. It also enables you to gain peace of mind knowing that you’ve taken every step necessary to reduce risks and achieve your goals.

With this type of insight – we call it Horizon Analytics – your business takes that next step. It can then establish the right type of operating and financial targets to boost your company’s value and growth potential with proper cash flow management. This is a customized blueprint towards financial stability across various scenarios that could play out over the next few years.

Are you ready to learn more about what could happen to your company? Our experts will sit with you to help think through your biggest financial concerns and get you started on running your business better.

Learn more about getting started with a customized, no-cost financial analysis and model for sustainable growth. Learn More

To learn more about our Horizon Analytics methodology and hear from our Clients how they’ve found it to be a true difference-maker, click here

prev title
next title

About Author

author photo
Author Name

It's demo author detail. Lorem Ipsum is simply dummy text of the printing and typesetting industry. Lorem Ipsum has been the industry's standard dummy text ever since the 1500s.