Top 10 reasons for poor cash flows in US mid-market companies

Over 75% of US mid-market companies have poor cash flow. A poor cash flow can not only stunt a company’s growth but can lead to a complete failure. It doesn’t matter if a company is highly profitable or has the best product in the market. If it doesn’t have enough cash to pay its employees, debtors, and suppliers, the company will shut down.

Here are the top 10 reasons that cause poor cash flow: 

  1. Loose payment terms used as an incentive to win deals. Custom payment terms are agreed with customers without enough consideration given to payment behaviors and other risk factors associated with them. This can be a significant root-cause of uncertainty in cash flows.
  2. Short staffed finance departments with manual processes. Once a company grows to hundreds of customers and suppliers, finance managers prioritize only bigger and complex deals leaving a long tail of cash flow issues unattended.
  3. Not enough automation and analytics for invoice collections. Collections is the biggest source of uncertainty in cash flow. Yet, most firms do not apply analytics to proactively identify likely late payments and act only once a payment is already late.
  4. Lack of a proactive dispute management process. Inefficient (and sometimes non-existent) dispute processes often result in significant payment delays and customer abrasion.
  5. Sales incentives not tied to receivables collections health. Collections can’t just be the finance manager’s priority. High performing firms tie sales incentives to receivable collections.
  6. Lack of robust cash-in projections. Inaccurate cash availability forecasts exacerbates uncertainties in cash flow. Finance managers respond by maintaining huge cash buffers which is an expensive “band-aid” solution.
  7. Cash-in and cash-out are delinked. Supplier payment schedules are not synchronized with receivables collections. When the Days Sales Outstanding(DSO) is much longer than Days Payable Outstanding(DPO), the cash buffer fills the gap, hiding the cash flow friction points.
  8. Calcified supplier payment policies. Most mid-market companies over-simplify their payment schedules. They pay invoices first-in-first-out once a week. These policies don’t consider cash inflow, opportunities to extend DPO, and dynamic discounting schemes.
  9. Lack of real-time cash flow data systems. Most of the cash analytics is performed in offline spreadsheets with data latency of weeks. Lack of real-time analytics limits the flexibility to optimize payment schedules on a daily basis. Again, the cash buffer hides the lack of responsiveness in the system.
  10. No peer benchmarking and goal setting. KPIs such as DSO, DPO, Cash Conversion Cycle, etc. vary significantly by industry and company size. Without peer benchmarks, finance managers may set up highly pessimistic or optimistic goals that cost the company significantly.

SimpliCapital empowers finance leaders to manage their company’s cash flow real-time. An inbuilt AI engine solves all the above problems through proactive alerts and recommendations to optimize cash flow.

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