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Driving peak performance... optimal decision-making...total engagement in the right tasks that sustain and move the business forward. Few processes are as critical to a company’s success as proper cash flow management.

 

To help you get into the flow of mastering cash flow management — fully immersed, focused, and involved — read on to learn:

 

  • Why your business’s health depends on proper cash flow management.
  • What are the essential skills for effective cash flow management.
  • 22 tips to improve your cash flow.
  • What is the most important step in cash flow management.
  • What is working capital and why it’s a prime indicator of your company’s worth.
  • Why knowledge of cash flow management is especially critically for small businesses.
  • 12 top cash flow issues small businesses face.

 

   SHORTCUTS:

What is cash flow management in business?

Managing and understanding cash flow in business is easy if you think of it as the money that comes into your business (cash inflows) with the money that goes out (cash outflows).

 

Cash flow management is a process of tracking, analyzing, and optimizing the money you receive through sales, for example, with the money you give out when you pay bills, salaries, or taxes.

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What is the objective of cash flow management?

Proper cash flow management helps ensure that your cash inflows are always higher than your cash outflows, so you have money available to meet current and near-term obligations. Cash flow management provides you with a clear view as to the health of your business.



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How is profit different from cash flow?

Cash flow is how much money is going into and out of your business at a given time. Profit is how much financial gain your company makes on the products or services it sells. If you bring in more money than it costs to run your business, you are making a profit. A company cannot survive unless it is profitable.

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What are the basic principles of cash flow management?

The driving principle of cash flow management is to ensure the company remains solvent with sufficient cash reserves at all times. Proper cash flow management requires strategizing, planning, forecasting, and making informed decisions based on thorough analysis. Effective cash flow management is also about making informed decisions on how to monitor and control expenses, what assets a company acquires, and with those it disposes of.

 

Note: cash flow and profit management’s core principles are different.

Cash flow management deals with managing the flow of income and balancing it against expenses to stay viable. Profit management involves making decisions to manage and maximize profits.

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How to manage cash flow in business

You know what cash flow is: the total amount of money that comes in and out of a business. You know that it’s a key indicator of the financial health of your business. You know a sustained, positive cash flow enables your business to grow, meet expenses, and invest. So the big question now is: how do you manage your cash flow successfully? Check out the actionable steps below to improve your cash flow:

 

         1. Manage payables strategically

  • Take advantage of creditor payment terms. If a payment is due in 30 days, don’t pay it in 15 days.
  • Try to extend payables as long as possible.
  • You should also prioritize and stagger your bills — paying the important ones first.
  • Carefully consider vendors’ offers of discounts for earlier payments.
  • Don’t always focus on the lowest price when choosing suppliers. Sometimes more flexible payment terms can improve your cash flow more than lower prices.

    2. Accelerate receivables

  • Offer discounts to customers who pay their bills quickly.
  • Require credit checks on all new non-cash customers.
  • Issue invoices promptly and follow up immediately if payments are slow in coming.
  • Provide your clients with several ways to pay.
  • Adjust your payment policies to require a deposit or partial payment upfront.
  • Consider online invoices, as well as provide online payment options.

    3. Be smart with inventory

  • Your cash flow largely depends on how you manage your inventory: know the cost of carrying inventory. Poor inventory controls could result in more stock than needed—and unnecessary storage costs.
  • Offer discounted prices strategically to move outdated inventory.

    4. Consider credit tools

  • Use a business credit card to pay for everyday expenses to free up cash. Also, take advantage of any rewards programs that can reduce your costs. It’s best to use credit cards for small purchases that you can pay off the next month.
  • A line of credit provides quick access to funds when needed and can help maintain a balanced cash flow cycle. A line of credit can bridge gaps between payables and receivables.

    5. Use technology

  • Accept online payments to collect receivables faster and use electronic fund transfers to pay bills on the due date automatically.
  • You should also use technology to manage your financial activities.

    6. Stay on top of bookkeeping

  • Learn your cash flow cycle — the time it takes to purchase raw materials, turn them into products, sell them, and collect payment.
  • Generate cash flow statements
  • Analyze your cash flow
  • Figure out whether you need to increase cash flow.
  • Cut spending where you need to.

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What are the 3 steps to an effective cash flow management system?

The following three activities are essential to a successful cash flow management system:

  1. Discipline around the number and types of ways the business can spend cash.
  2. Weekly forecasts of its cash position — including cash receipts and disbursements.
  3. Consistent effort to find hidden sources of cash, e.g., dormant cash accounts, unclaimed property, collection of tax credits.

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What is the most crucial step in cash flow management?

It should come as no surprise that the most important aspect of cash flow management is avoiding prolonged cash shortages. You won’t stay in business if you can’t pay your bills for an extended period. So the most critical step in cash flow management is measuring liquidity — the amount of money on hand to meet current obligations — coupled with establishing robust billing and collection practices.

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Why is cash flow management important for a business?

Cash flow management is simply tracking the money coming into your business and monitoring it against the money going out to cover bills, salaries, and other expenses. Proper cash flow management benefits a company in two significant ways:

  • It provides a complete picture of cost versus revenue and ensures the business has enough funds to pay its bills while making a profit.
  • Staying on top of cash flow enables the company to forecast profits more accurately and identify investment opportunities.

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What is working capital?

Working capital is the money available to meet your current short-term obligations. It is the difference between existing assets and current liabilities and comprises inventories, accounts receivable, accounts payable, and cash.

 

FundThrough writes: “The ability to properly manage working capital directly correlates to the growth of your business, not to mention its overall operational viability. Positive working capital is about more than keeping cash on hand and having a financially solvent company. It’s about how you’re using that money and if you have the business acumen necessary to capitalize on your assets.”

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What are the three cash-related activities of a business?

1. Cash Flow from Operating Activities

Cash Flow from Operating Activities is cash earned or spent in regular business activity — how your business typically makes money by selling products or services.


2. Cash Flow from Investing Activities

Cash Flow from Investing Activities is cash earned or spent from investments your company makes, such as purchasing equipment, real estate, or investing in other companies.


3. Cash Flow from Financing Activities

Cash Flow from Financing Activities is cash earned or spent in financing your company with loans, lines of credit, or owner’s equity.

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Why is knowledge of cash flow management especially critical for small businesses?

According to research by U.S. Bank, the reason why 82% of small businesses fail deals with cash flow issues, including poor cash flow management skills and a poor understanding of cash flow.

 

Because of their size and often limited ability to access financial resources, small businesses are often disproportionately affected by negative cash flow. While larger businesses may have funds available to avoid late payments, smaller companies must rely on more predicted monthly income to meet their financial commitments.

 

A worst-case scenario: the business owner’s only option is to use personal funds to keep their business going. Long-term negative cash flow can put the business owner’s plans for growth and improvements on hold. Scrambling month-to-month to stay afloat can be exhausting. It’s not surprising that QuickBooks research found that 71% of small business owners have lost sleep worrying about their cash flow.

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What are the top common cash flow problems small businesses face?

  • Underestimating startup costs
  • Expecting Profitability Too Quickly
  • Not creating a cash flow budget
  • Overlooking high overhead costs
  • Growing too quickly
  • Low profit margins
  • Lacking cash reserves
  • Expensive borrowing
  • Outstanding receivables
  • Too much inventory
  • Seasonal changes in demand
  • Inaccurate forecasting


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Should you use credit cards to manage your cash flow?

It’s best to reserve credit cards for purchases that you can pay off the following month. Avoid using credit cards for large purchases because of the higher interest rates. Instead, research using a line of credit or a loan for larger purchases.

 

Getting into the flow

Cash flow management plays a critical role in ensuring the company’s financial viability and sustained success. Optimizing company assets, informing strategies, driving the right behaviors are all a result of proper cash flow management.

 

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CHAPTERS

01    How Do You Manage Cash Flow in Business?

Worrying about managing your cash doesn’t need to keep you up at night. “How Do You Manage Cash Flow in Business?” offers actionable steps to help ensure you have enough cash on hand to meet near- and longer-term obligations, including 22 tips to improve your cash flow.

 

02   Why Are Cash Flow Statements Important for Business?

The cash flow statement informs the company’s short- and long-term planning. But it can do much more -- predict future cash flow, eliminate waste, reduce expenses, provide insight into spending activities, and identify opportunities to create additional cash - as revealed in “Why Are Cash Flow Statements Important for Business?.”

 

03    How Much Cash Flow Should a Business Have?

Knowing how much cash you should have on hand to weather unexpected expenses or business downturns is critical to your business’ success. “How Much Cash Flow Should a Business Have?” covers this and many other crucial topics, including how three simple strategies can help prevent the most common cash flow problems small businesses face.

 

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