Optimize Your Business Cash Flow: Advice for Sustainable Growth

Strong cash flow is the heartbeat of a healthy business. While startup capital is essential as we explored in our recent article, How to Start a Business Strong, managing cash efficiently over time is what helps businesses grow—and survive.

According to a Bureau of Labor Statistics 2024 study, 20% of businesses close in their first year, often due to lack of access to capital or poor cash flow management. And even among businesses that make it past that first year, many continue to struggle with the day-to-day demands of managing incoming and outgoing cash.

So what can you do to better manage your business’s cash position—and avoid becoming a statistic?

Understand the Cash Conversion Cycle

Every business, whether product- or service-based, has a supply chain. That means money often flows out before it comes in. If you sell products, you need to purchase inventory or materials before your customer pays you. If you are a service-based business, you need to pay employees for services delivered before receiving payment. This creates a lag in cash flow that, if not managed properly, can lead to gaps or even potential crisis points.

Understanding and improving your cash conversion cycle (CCC) is one of the most effective ways to unlock working capital. You can unlock more control over your cash conversion cycle by simply talking with your banker about how you can most effectively collect and make payments.

Collect Payments Faster with Merchant Services

No bank product can supersede a disciplined collection practice. However, one of the simplest ways to improve your cash conversion cycle is by accelerating the collection of payments. Many businesses still operate with outdated or basic banking tools, not realizing that advanced merchant services platforms can be set up through your bank—even for small businesses.
By implementing solutions like tap-to-pay, you’re not only delivering the solutions consumers want; you’re also streamlining your checkout process for greater efficiency. This can get you next day funding on your batches, reducing your collection cycle by 1-2 days.

With Merchant Services, you can:
• Accept debit and credit card payments in-store, online, or on-the-go
• Get next-day funding in most cases
• Easily track sales, inventory, and reporting from one dashboard
• Integrate seamlessly with your business banking

Other collection methods like ACH Debit Capabilities speed up the collection time, providing your business with the necessary cash to continue to operate and maintain optimally.

Be Strategic with How You Pay

Just as important as how you collect is when to pay. Many business owners default to paying bills as soon as they come in, but timing payments strategically can improve your cash flow.

Using business credit cards wisely to extend your payment timeline without incurring interest can be an effective cash management tool. For example, your vendors have payment terms and using a credit card to pay on the date the term expires (or earlier) can extend your payment period while staying in the good graces of your supplier. Paying the full balance on the card when that billing cycle closes means you have as much as 60+ days to pay that invoice. During that time, your business is likely collecting payments. That means your business has the cash it needs, limiting your need to borrow for working capital. This is called inverting the cash conversion cycle.

Real World Example:

Using the strategy above, your business has $1 million in annual cost of goods sold (COGS), and you negotiate a 2% early pay discount with your vendors (a 2% discount on the invoice amount if you pay within 10 days). Additionally, if you utilize the credit card float outlined above, that’s a $20,000 discount, and you’ve built creditability with your vendor for paying early. Plus, if the card has rewards, that’s another win!

Identify Your Cash Conversion Cycle

To understand your cash flow, start by tracking these key performance indicators (KPIs):

• Accounts Receivable Days on Hand:
  • A/R (average or point in time) ÷ Net Revenue × Days in Period
• Accounts Payable Days on Hand:
  • A/P (average or point in time) ÷ COGS × Days in Period Measured
• Inventory Days:
  • Inventory (average of point in time) ÷ COGS × Days in Period Measured
• Average Daily Sales:
  • Annual Revenue ÷ 365

The goal? Collect faster than you pay. Every day you do that, you unlock more working capital—money that can be reinvested into your growth rather than borrowed from your bank.

Partner with a Bank That Understands Small Business

Many small businesses don’t realize they’re missing out on time-saving, cost-saving tools—simply because they haven’t been shown what’s available. If you would like help thinking through your cash conversion cycle, let’s talk.

Explore more in our Business Series:

• How to Start a Business Strong
• When Is It Time to Outsource?
• Future-Proofing Your Business
• Do I Click that Link?: Fraud Prevention for Businesses