In 2023, it is critical for companies to know how much actual cash they’ll have on hand in the near and mid-term, what inflows to realistically expect in the future, and how much runway that leaves the company. Maintaining a sufficient cash balance remains a top priority for every CFO. Stefanie Layne, Director of Treasury at Unity Technologies, who shared her thoughts on a past Tesorio webinar, and other finance executives are touting the benefits of the free cash flow positive state, where a company's cash inflows exceed the outflows required to operate and grow. Here are some strategies to help your organization become free cash flow positive in the current landscape.

Embrace Direct Method Cash Flow Forecasting

Traditional or indirect cash flow forecasting, while suitable for long-term planning, may fall short when you need real-time visibility into your cash position in the near and mid-term. Adopting the direct method of cash flow forecasting allows you to monitor all cash inflows and outflows throughout the quarter. This includes scrutinizing outgoing payments such as payroll, accounts payable, tax obligations, lease payments, insurance premiums, and stock payouts. On the incoming side, closely monitor accounts receivable, collection efforts, dividend payments, capital gains earnings, and asset sales. By utilizing the direct cash flow forecast, you can obtain an up-to-date, no-lag picture of your company's cash position.

Promote Cash Flow Literacy Across the Organization

While the finance team naturally focuses on cash flow, it's important to raise awareness and understanding of cash flow throughout your entire organization. Even though managing cash flow may not be their direct responsibility, every employee's actions and decisions can impact it. To ensure a positive effect, consider the following approaches:

• Incorporate cash flow into your organizational values.

• Provide cash flow education to new hires and existing employees.

• Discuss cash flow regularly in enterprise, departmental, and team meetings.

• Establish a connection between cash flow, employee job descriptions, and performance evaluations.

Optimize the DSO-to-DPO Ratio

As part of cash flow management, companies typically track their Days Sales Outstanding (DSO) and Days Payable Outstanding (DPO), but it’s also worthwhile to look at the ratio between the two. If your DSO-to-DPO ratio indicates that you are paying out cash faster than you are bringing it in, the ratio needs to be flipped to a positive state. Consider employing the following strategies:

• Prioritize and pace vendor payments based on criticality and aging.

• Utilize an automated accounts receivable system to streamline collections and personalize dunning campaigns to positively influence customer behavior.

To support your efforts in achieving a free cash flow positive state, leverage digital finance tools such as Tesorio's Cash Flow Performance platform. These solutions can assist in optimizing cash flow management.

Ready to improve your cash flow forecasting and achieve a free cash flow positive state? Speak to a cash flow expert today.