How can companies improve cash flow management?

Effective cash flow management starts with understanding why cash problems arise and what they cost. Michael C. Jensen at Harvard Business School highlighted the agency problem in corporate finance where managers may hoard cash or invest in low-return projects, creating inefficiencies and raising default risk for creditors. That theoretical insight helps explain a common cause of poor cash management: misaligned incentives and weak governance. Consequences include missed payroll, lost supplier discounts, constrained growth, and, in severe cases, insolvency. The human costs are real: employees, suppliers, and local communities can suffer when firms run out of operating liquidity.

Strengthen forecasting and scenario planning

Accurate forecasting is the foundation of better cash management. Aswath Damodaran at New York University Stern School of Business emphasizes linking cash flow forecasts to realistic scenarios and to firm valuation principles so managers can see the consequences of shortfalls on investment decisions. Rolling forecasts that update weekly or monthly, combined with stress-testing for revenue shocks and supply disruptions, reveal timing mismatches between inflows and outflows before they become crises. Forecasts should incorporate seasonality, customer payment behaviors, and territorial differences in payment culture; for example, firms operating across regions with slower average receivable turns often need higher precautionary liquidity.

Optimize working capital and financing

Working capital levers and access to flexible financing directly improve liquidity without sacrificing growth. Shortening the cash conversion cycle by accelerating receivables through electronic invoicing and selective early-payment incentives, or by reducing excess inventory using just-in-time or demand-driven replenishment, frees cash tied to operations. Extending payable terms strategically and establishing supply-chain finance arrangements can harmonize timing without harming supplier relationships. Establishing committed facilities such as revolving credit lines and creating a layered liquidity strategy that combines bank lines, invoice financing, and internal cash pooling spreads risk across sources and reduces dependence on any single provider.

Improve systems, governance, and culture

Automation of collections, integrated enterprise resource planning, and centralized treasury operations increase visibility and control. Clear policies governing how much cash to hold, approved uses for surplus cash, and escalation procedures for shortfalls align behavior with financial objectives. Training managers in liquidity metrics and tying some performance measures to liquidity preservation can mitigate agency problems identified by Jensen and help create a culture that values sustainable cash management. Transparency with stakeholders, including lenders and key suppliers, often yields practical concessions during tight periods and preserves reputational capital.

Consider environmental and territorial nuances

Environmental shocks such as extreme weather and geopolitical disruptions disproportionately affect firms in vulnerable regions, making contingency planning and local knowledge essential. Cultural norms around payment terms and trust determine how negotiable contracts and collections processes are; adapting practices to local expectations while maintaining consistent global policies helps multinational firms reduce surprises. By combining robust forecasting as advocated by Damodaran, disciplined working capital management, diversified financing, and strong governance, companies can materially reduce cash flow risk and protect employees, communities, and long-term value.