Fundamentals of Cash Flow Management

Updated: Jan 26

Cash flow can be referred to as the heart of a company.


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It’s one of the most critical components of businesses and the fuel that keeps the engines running. Without cash flow, company profits are meaningless. Unfortunately, most business owners don’t have a handle on their cash flow. And that’s why some profitable businesses can still fall into financial ruin.


What Is Cash Flow Management?

Simply put, cash flow management is the process of tracking how much money comes in and out of your business. It should be tracked either weekly, monthly, or quarterly.


Two Kinds Of Cash Flow

  • Positive cash flow - occurs when the inflow from sales, accounts receivable, etc., is more than the outflow from accounts payable, monthly expenses, etc.

  • Negative cash flow - conversely, this occurs when cash outflow is larger than cash inflow. This is a big red flag. However, there are ways to remedy it and generate more cash while maintaining or cutting expenses.

Positive cash flow isn’t achieved purely by luck. You need to put in the effort by learning proper and effective cash flow. Strategically managing cash flow gives you the ability to control it. Performing regular cash flow analyses will ensure you have enough money each month to cover your obligations for the next.


Does Profit Equal Cash Flow?

cash flow
cash flow

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The simple answer is: no. Your profit and loss statement does not indicate the cash flow of your business. This is because many more financial figures factor into it, such as accounts receivable, accounts payable, inventory, and other things.


Profit is simply revenue minus expenses. Invoicing a customer for products or services sold to them creates revenue. Actually collecting the money on that invoice is what makes cash. Thus, knowing whether you earned profit or incurred loss isn’t exactly the same as knowing what happened to your cash.


However, both concepts are certainly related. Positive cash flow is necessary to generate profit. So you need to structure your business to have the positive cash flow for your business to grow and increase its profits.


What Is The Value Of Cash Flow Management?

With the management of cash flow, you can predict if enough cash will be available to your business in the future. It also helps determine the amount your business needs to cover financial matters, such as debts and monthly expenses. Keeping track of how money flows within your business and analyzing these changes will allow you to spot trends and opportunities. It can also help you prepare for the future and increase your business’s financial stability.


Cash flow management offers many benefits such as:

  • Ensuring your business doesn’t run out of cash.

  • Eliminating the constant fear of not knowing how much cash you have now or in the future.

  • Improving relationships with your suppliers because they will no longer bug you to pay your past invoices.

  • Predicting cash flow problems before they happen.

What Can You Gain From Cash Flow Management?

As a business owner, cash flow management is essential for you in continuity planning. It can help you stay on top of your business’s financial status, and it can help you keep a steady footing. In addition, this allows you to avoid losses, especially during uncertain times such as the global pandemic.


For you to have effective cash flow management for your business, you must analyze your working capital requirements. Additionally, you should focus on optimizing your cash flows and finding ways to prolong payment obligations. Cash flow projections can also help you manage upcoming payments to ensure you’re prepared for possible future setbacks.


How Should You Manage Your Cash Flow?

Cash flow can be one of the greatest concerns of businesses, especially smaller enterprises and startups. It’s important to pay attention to each aspect of your cash flow statements because your cash reserve isn’t unlimited. If not handled well, it will just continue to decline until it runs out.


You need to update your cash flow forecasts regularly to be in-the-know of where you’re at in terms of finances. In addition, you need to identify possible opportunities where you can conserve cash and optimize your cash flow.


Keep in mind that your business won’t survive without cash flow; meaning, you need to keep the money moving. However, you have to be aware of the balance between what comes into your business and what goes out of it. After all, too much outflow or not enough inflow leads to financial ruin.


Planning And Monitoring Cash Flow


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Cash flow management means planning and monitoring your cash flow. That way, you can keep track of your financial health and make informed decisions regarding your business.

Making a cash flow statement is the best way to forecast the inflow and outflow of cash. You’ll need to estimate and record the following for each month:

  • total monthly cash inflow

  • total monthly cash outflow

  • net cash flow

  • opening balance

  • closing balance

With a better understanding of your cash flow, you can measure your business’s performance and make smarter decisions. Your cash flow forecast can help identify financial opportunities to ensure your business is aligned with your mission and vision.


How To Improve Your Cash Flow

Most businesses think that growing their business is the solution to their cash flow problems. So they grow their business, only to find that they also grew their cash flow problems. As a matter of fact, expanding your business puts a huge strain on cash. This just means that cash flow management is key to growing your business and not the other way around.


Here are some practical steps to improve your cash flow management:


Collecting Receivables

Speeding up the receipt and process of receivables can create positive cash flow, and there are several ways to do it such as, using a lockbox service that allows distant clients to mail their payments and get checks processed by banks quickly; asking customers to preauthorize checks and centralize your bank, and offering discounts to customers if they pay bills quickly.


Tightening Credit Requirements

Before extending credit to customers, do your research beforehand to determine the risks. Find out if they can pay their bills on time and whether their business is growing or faltering. Figure out if they have cash flow problems as well. You can ask customers to fill out a credit application to ensure you get paid in time. In addition, you may also check references or accept credit cards.


Increasing Sales

If you need more cash, it’s natural to aim to attract more customers or offer more products. But new customer acquisition takes time and money to convert into sales, so focusing on existing customers is probably best. First, figure out what your customers are buying and why. With that information, you can increase your profit margin and generate more cash.


Pricing Discounts

Another option to increase the cash flow is to offer discounts when your customers pay early. It may impact your profit margin, but it helps with cash flow management. After all, it encourages customers to pay earlier than billing cycles typically require.


Securing Loans

When dealing with short-term cash flow problems, you might need to take out a loan from a financial institution. Some possible types of loans are credit lines or equity loans. Another option is a long-term amortized loan, which includes interest and principal until the loan is repaid.


Forecasting Your Cash Flow

As already stated, cash flow forecasting and projections are crucial for businesses. Monitoring your sales trends and upcoming expenses helps identify potential cash flow shortages in the near future. After preparing a cash flow forecast, explore what -if scenarios to measure how your cash flow will fare in the future.


Getting Expert Advice

The quickest and easiest way for you to get a cash flow analysis would be to hire a professional financial adviser. Collaborating with a CFO gives you access to expert advice while they assist in assessing your individual situation. You can rest assured that all aspects of your business will be considered.


Getting Control Of Your Cash Flow

The simplest way to get a sense of your business’s cash flow is by asking these two questions:

  1. What is my cash balance right now?

  2. What do I expect my cash balance to be six months from now?

One way to keep your cash flow situation under control is to track your cash flow results every month to determine if your management is generating the type of cash flow your business needs. It also helps you improve your cash flow projections, which allows you to make better, smarter decisions.


Cash Flow Management As A Business Strategy




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Cash flow management doesn’t focus solely on the flow of cash into and out of your company. Instead, it involves a thorough assessment of what’s in your cash flow statements. That means you must not dedicate your full attention toward just keeping the money moving. You also have to look at the actual value of every inflow and outflow in your accounting records. In addition, you have to assess the factors that affect points in your cash flows.


Managing your cash flow requires reviewing which transactions benefit or hurt your company. With that information, you can build strategies that will help you secure short and long-term business success. Cash flow management will also help you identify other remarkable points within your current operations that you can use to create and find opportunities to increase cash flow in the future.


The business landscape changes from time to time, and cash flow management is a critical tool to help your company adapt to these changes. It can help you improve business processes such as revenue management, partnerships, digital marketing, and operations.


Working with a CFO on cash flow management can also lead to the increased productivity of your employees, allowing you to deliver better value to your customers.


As you go about the cash flow management strategies suited for your company, continuous communication will be necessary. You should keep your employees informed about the plans you will implement to build trust and avoid untoward surprises.


The Final Straw

Any business can be at risk of financial collapse if its finances are poorly recorded and handled. Even profitable businesses can fail if cash flow is not managed properly. Fortunately, a CFO can help you and your business assess your company and create personalized cash flow and continuity strategies.


Cash flow management can be confusing and intimidating, but it’s a business aspect that you can’t ignore. After all, it can help you build up your business and avoid financial nightmares. Cash flow management is also imperative if you want to see your company succeed.

But don't fret!

Profit Reimagined is just one chat away from helping you understand these concepts and execute these strategies.

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