3 Ways to Achieve a Free Cash Flow Positive State

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In 2020, cash flow became as big a buzz phrase as social distancing because it was just as important to company safety and soundness as maintaining six feet of distance. Having enough cash on hand became the number one priority of every CFO, and this will be one of the pandemic’s lasting legacies. That’s why Stefanie Layne, Director of Treasury at Unity Technologies, who shared her thoughts on a recent Tesorio webinar, and other finance executives are touting the benefits of the free cash flow positive state—the ideal point at which a company’s cash inflows exceed the cash outflows required to run and grow it. Here’s how to start turning your company into a free cash flow positive organization.

Adopt Direct Method Cash Flow Forecasting

Last year proved that traditional or indirect cash flow forecasting, while useful for long-term planning, is ineffective when you need to know how much actual cash you’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. That’s where the direct method cash flow forecast comes in. Rather than waiting to see what the quarter-end financial statements say about your current and expected cash position, the direct method cash flow forecast monitors all company data related to cash inflows and outflows throughout the quarter. You scrutinize everything on the outgoing side, including payroll and AP runs; tax, lease, and insurance payments; and even stock payouts in the case of public companies. On the incoming side, you keep a close eye on AR runs, collection efforts, dunning campaigns, dividends, capital gains earnings, and asset sales. The end result of the direct cash flow forecast is a no-lag, real-time picture of company cash.

Elevate Cash Flow Literacy

Your finance team thinks about cash flow all the time because that’s their job. But what about the rest of your employees? While managing cash flow isn’t their direct responsibility, how they perform their jobs and key decisions they make has an impact on it. If you want that effect to be positive rather than negative, you need to increase employee cash flow literacy, which can be done in several ways:

  • Weave cash flow into your organizational values
  • Educate new hires and existing employees about cash flow
  • Discuss cash flow at enterprise, departmental, and team meetings
  • Correlate cash flow to employee job descriptions and performance

Flip 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 that metric shows that you’re paying cash out faster than you’re bringing it in, your DSO-to-DPO ratio is inverted and it needs to be flipped to positive by manipulating key levers such as:

Digital finance tools like Tesorio’s Cash Flow Direct and Automated Accounts Receivable can support all of your efforts to achieve a free cash flow positive state. Ask for your demo today. To learn more about adopting a direct cash flow forecast and creating a free cash flow positive state, listen to Tesorio’s recent webinar, Solving the Cash Flow Disconnect.