Cash Flow Management


Cash flow is the money the company or business has coming in from revenue and going out for expenses. Sound cash flow management will always ensure the business always has money available for paying its expenses when they are due. Even a profitable business can struggle and ultimately fail when cash flow is not managed correctly. If you don’t have enough money available to pay your lenders or suppliers, banks may foreclose, and suppliers could also cut the supply of services or materials.
There are many areas in a business that can have a negative or positive impact on cash flow. It is critical to understand customer payment terms, supplier payment terms, loan payments terms, any future capital expenditure, in fact, any decisions that require spending can affect cash flow.

There are essentially two kinds of cash flows:

Positive cash flow: This occurs when the cash is coming into the business from sales and accounts receivable – is more than the amount of the money leaving the businesses through accounts payable, monthly expenses, salaries, loan repayments and other the various business expenses.
Negative cash flow: This occurs when your outflow of cash is higher than your incoming cash. Generally, this spells trouble for a business, but there are steps you can take to remedy the situation and generate or collect more cash while maintaining or cutting expenses.
Achieving a positive cash flow requires planning and work. The business firstly needs to analyse and manage cash flow effectively to have control of incoming and outgoing of cash. The undertaking cash flow analysis is literally to make sure you have enough cash each month to cover your obligations in the coming month.

Profit versus Cash Flow

Profit does not equal cash flow. You can’t just look at your profit and loss statement (P&L) and get an accurate picture of cash flow. Other financial figures feed into factoring cash flow, including accounts receivable, inventory, accounts payable, capital expenditures, and servicing of debt. Smart cash-flow management requires focusing on each of these drivers of cash, in addition to your profit or loss. It’s critical, and very few businesses or owners have realised but knowing whether the company has earned any profit (or even created a loss) is not the same as knowing what happened to its cash. Profit, as defined by the rules of accounting, merely is revenue minus expenses. Invoicing a customer or client for products or services sold to them only creates the revenue. The collection of money on that invoice is what creates cash.
Positive cash flow is critical to generating profits. The business will always need enough cash to pay it’s employees and suppliers so that products or services are supplied. However, if the business does not have the money to provide services or goods – there is no profit. So all companies big and small need to structure their business to have a positive cash flow if they want the business to grow and increase profits. Building a business puts a considerable strain on cash flow. Almost all companies have to make some investment in certain expenses before achieving higher revenue and increased cash flow that comes with successful growth.

How to Improve Cash Flow

Most businesses see growth as the solution to a cash-flow problem. That’s why they often achieve their goal of growing the business only to find they have increased their cash-flow issues in the process. Planning for growth and the related cash outlays in advance is fundamental to a successful business.
Collecting receivables – the timely collection and receipt of receivables are paramount. Keeping customers to paying within terms. Keeping debtors days to an absolute minimum is critical.

Tightening credit requirements – Businesses often have to extend credit to customers, particularly when starting out or while growing. This should be managed carefully and researched to determine the risk of extending credit to each customer. Are they able to pay their account on time? Is their business growing or faltering? Are they having cash-flow problems? Perhaps a recommends a report on potential customers and ask them to fill out a credit application. Always check references. Another option is to consider accepting credit card payment. It will cost a percentage, generally from 2 to 5 per cent of the sale.

Increasing sales – When a business needs more cash, it always seems simple to attempt and attract new customers. Sell additional goods or services to the existing customers. However, the reality may be harder than the theory. New customer acquisition is essential to growing any business, but it can require a fair amount of already stretched resources, time and money to convert prospects into sales. Selling more to existing customers is cheaper, and you may be able to do this by analysing what they’re buying and why – information that may even lead you to increase your profit margin and, hopefully, generate more cash. However, the SBA warns businesses to be careful when growing sales because you may improve your accounts receivables and not actual cash if these sales are on credit.

Pricing discounts – One option for increasing cash flow is to offer your customers discounts if they pay early. While this practice may impact your profit margin, it may help your management of cash flow by incentivising customers to make payments earlier than billing cycles typically require. Your company may also take advantage of this with suppliers and others that you owe, but be careful that your early payments of debt don’t leave you with a cash flow shortfall. Incentives such as early settlements discount to customers if they pay quickly can also be implemented.

Securing loans – Short-term cash flow problems may sometimes necessitate a business taking out a loan from a financial institution. Some possible types are revolving credit lines or equity loans. Most of the time this type of borrowing accomplishes its goals, although during the financial crisis many banks were cancelling credit lines and calling in loans. Another option is a long-term amortised loan which includes interest and principal until the loan is paid off.