Cash Flow Management

What is Cash Flow Management?

Cash flow basically implies the movement of cash in or out of your business. You should be tracking this either weekly, monthly or quarterly. Running a business without cash management is like paddling boat without an oar. Poor cash flow management it only takes to the downfall of your business. 

In every Company, cash flow management is the method of tracking, assessing and optimizing net cash receipts minus cash expenditures. Net cash flow is an important financial health metric for any company. It allows the business owner to determine the best cash needs; this can be done by calculating the monthly cash requirements and defining the sources from which they can be met.

Cash flow management involves:

➲ Knowing when, where and how the cash needs will occur;

➲ Identifying the best ways to meet additional cash needs; and

➲ Being prepared to address those needs when they occur;

Cash Flow Control (Some Cash Flow Control Advantages)

1. It helps to prevent cash shortages, triggered by a disparity between cash inflows and outflows.

2. It helps to manage your cash flow and helps monitor business expenditures in a way, setting goals for your revenue and realization of revenue.

3. Helps to efficiently handle of available cash/resources.

4. Facilitates prompt debt repayment planning.

5. Investments should be made on time with the resources available.

6. Facilitates quick negotiation with borrowers in borrowing terms.

7. Helps in predicting client deviation.

8. Preparation of cash flow, availability of sufficient funds and their control are some of the basic needs of any business.

9. One of the main cash management goals is to reduce or remove uncertainties when cash management is requirements

10. Management help in making a prediction as per the current pattern.

Here are some ways which will help you sail your cash flow boat in the right direction:

➲ Evaluate your business breakeven point

You will know when your company will be profitable, not that it will affect your cash flow — because it won't — but because it gives you an early objective to aim for and a ready-made target for potential cash flow predictions. A grim mix of negative cash flow and negative profits.

➲ Aim on cash flow management not on profits

Use the breakeven as a benchmark. Of course, you do need to control your cash flow until you hit breakeven and your company is profitable.

➲ Create a Cash Reserve

Create some cash reserve which will help you to manage your working capital required for running your business.

➲ Create cash flow worksheet

It will help you to track the inflow and outflows of cash from your business.

Points to be Considered

While managing cash flow following needs to points needs to consider:

1. Analyse past cash inflow and outflow pattern while preparing a cash budget

2. Maintaining regular, periodic and standardised records like sales, purchase, debtors, creditors and cashbook on regular basis which is essential for cash flow management

3. Specifically raised fund should be utilised for the specific task only

4. Fund diversion from anticipated use to other users can hamper the liquidity of funds

5. One of the important aspects of cash flow management is the timely recovery of funds from debtors and receivables.

6. Manage the surplus cash, invest it properly, considering the risk and return, never keep it idle

7. Any company needs funds for various reasons, such as long-term funds for the purchase of fixed assets and short-term funds for day-to-day business operations. Funds to which they are raised should be used

8. Profit jump doesn't automatically mean more cash on hand. Profit is the amount of money that the company receives over a given time span, while cash is what it has at its disposal to keep its business running

Documents required to be keeping up to date for cash flow management:

➲ Cash book

➲ Sales register

➲ Purchase register (and other cash out flow register)

➲ Debtors register

➲ Bank passbook

➲ Creditors register

➲ Miscellaneous receipts (if any)