Beginners Guide to Cash Flow Management

Having a clear cash flow management system in place allows you to identify and plan for recurring expenses, like payroll and supplies.

Cash flow management is the process of tracking how much money is flowing into and out of your business. Having a clear cash flow management system in place allows you to identify and plan for recurring expenses, like payroll and supplies. 

It also allows you to predict and plan future cash flow for potential growth. Cash flow management ensures that you have cash available when needed, for recurring expenses and expansion. For small and medium-sized businesses, a good handle on cash flow can make the difference between success and bankruptcy. That is why they say cash is king. 

Basics of Cash Flow

Cash flow can either be positive or negative. Positive cash flow means more money is coming into the business than is flowing out. Negative cash flow is the opposite: the business expenses exceed the cash coming into the company. Even if your profits exceed your expenses, you might not have positive cash flow. That is why it is so important to look beyond income and expenses and put in place a cash flow management system. 

Cash Flow vs. Profits 

Profits are the income on goods or services of your business. Profit is simply revenue (income) minus expenses. Whether you earned a profit or created a loss is important, but that does not give the picture of cash flow. 

Cash flow is how much of that revenue has actually been collected and where it is in the production process. If you have made a sale to a client and issued an invoice, your profit and loss statement will show revenue. But until the client pays the invoice, you will have negative cash flow on the transaction. 

Cash When and Where it’s Needed

Continuing the example, if the client does not pay on time, you might not have the cash needed to cover the payroll at the end of the month, or to buy the supplies necessary to produce more goods. Without material to produce final products, future income is curtailed. 

Cash flow management is the process of ensuring you have enough cash available at every stage of the business operation so that you never come up short. A profit on paper is excellent, but if you cannot produce more products to sell, the business’s growth will be stunted. 

Cash for Growth

Cash flow management is essential to ensure continued expansion and greater returns. Planning for future growth includes opening additional offices or production facilities, investing in a larger inventory, or expanding a product line. With a good cash flow management system in place, you can plan for these expenses in the coming months or years. 

Without cash flow management, the business is left chasing the next expense and trying to keep up. Cash flow management helps to build growth potential into the business.

Determine Current Cash Flow

How do you know if your company has positive cash flow? To understand your company’s current cash flow situation, look deeply into not only revenue and expenses, but also accounts outstanding or in collection, inventory, supplies, and liabilities. 

Most accounting software will generate a cash flow statement, or an accountant can help to get a clear picture of the current business cash flow as well as suggest steps to improve cash flow. 

5 Ways to Improve Cash Flow

Improving cash flow can be as simple as tightening receivables and lines of credit. Here are five tried and true way to move toward sustainable positive cash flow:

  1. Collect receivables — Setup systems for automatic debits, automatically cash of checks, centralize banking — make it easy for customers to pay.
  2. Credit requirements — While many businesses offer lines of credit to customers, it is safe to only do this after checking their credit history and getting recommendations. A more secure alternative is to take credit card information as a backup. 
  3. Increase sales — This is the fastest way to increase cash flow, but only if the sale is made by direct payment and not invoiced or given a line of credit. Increasing sales with existing customers is generally the most effective short-term strategy. 
  4. Create payment incentives — For customers purchasing by invoice, offer a discount for payment by a certain date to increase cash flow. 
  5. Secure loans — In the case of a short term cash flow problem, a revolving credit line or equity loan can carry the business until outstanding revenue can be collected. 

Putting it All Together

Cash flow management takes time and attention, but can make the difference between success and failure for your business. Whether you choose to hire an accountant or use one of the many accounting apps available, regular management of business cash flow will allow you to plan for business expansion and growth.


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