Cash flow management is the process of tracking how much money is coming into and out of your business. This helps you predict how much money will be available to your business in the future. It also helps you identify how much money your business needs to cover debts, like paying employees and suppliers.
It is the term used to describe changes in how much money your business has from one point to another. Cash flow management is keeping track of this flow and analyzing any changes to it. This helps you spot trends, prepare for the future, and tackle any problems with your cash flow.
It pays to practice cash flow management often to make sure your business has enough money to keep running.
The Importance Of Cash Flow Management
Cash flow management is the most important aspect of every business. A healthy cash flow ensures that the business can pay salaries on time and have funds for the growth and expansion of the business. Resources are also available for paying vendor bills and taxes on time. Regular analysis of business finances ensures that one can project future cash flow with accuracy and take necessary action.
Following up on client payments and managing the accounts receivables effectively, ensures the timely flow of cash, as required by the business.
Notable Facts: Poor cash flow management may lead to business failure.
The 9 Steps of Good Cash Flow Management
Cash flow management is crucial in all businesses. It involves ensuring you have more money coming into your business than going out. This lets you pay suppliers on time, buy stock, keep operations running smoothly, and invest in your business. Here are the nine steps of good cash flow management.
Step 1: Put in Place Good Credit Control Procedures
Start with your credit control procedures. This includes deciding on payment terms and ensuring those terms are properly communicated to your customers both in your paperwork and in sales interactions. You should also have procedures in place for occasions when invoices become overdue.
Step 2: Produce Regular Sales Forecasts
Sales forecasts help you understand the cash you are likely to see in your business over the coming months. They are similar to targets, but they should be as realistic as possible. The ideal situation is when your forecast closely matches reality.
Step 3: Negotiate Good Supplier Terms
This includes getting enough time to pay your invoices so there is as little lag as possible from the time you pay until the time your customers pay you.
Step 4: Put in Place Tight Stock Control Measures
It is easy to run into problems when you have cash tied up in stock you can’t sell fast enough. Therefore, it is important to manage stock levels and get the right balance, i.e. getting stuck in on time and at the right price while avoiding having cash tied up in stock unnecessarily.
Step 5: Control Spending
This applies to all aspects of your business including buying equipment and other expenses. You should control costs through all business cycles, including when things are going well, to help you more effectively manage your cash flow.
Step 6: Reduce Unnecessary Costs
This one follows from the previous step. You should regularly look at the costs in your business and make efficiency savings wherever possible. The more control you can have over costs, the easier it will be to manage cash flow.
Step 7: Produce and Read Financial Reports
A key part of effectively managing cash flow is having a proper understanding of your business. For example, are sales ahead of expectations or behind? Are there areas of your business that are underperforming or costs that have dramatically increased? Do you understand the trends your business currently faces? You can find all this information and more by reading financial reports – cash flow reports, sales reports, balance sheets, forecasts, profit and loss reports, etc.
Step 8: Learn How to Spot Warning Signs
There will be signs in your financial reports and elsewhere that can indicate potential future cash flow problems. For example, a major customer may tell you they plan to temporarily reduce spending which could have an impact on your cash flow a few months down the line. Currency exchange rates, the weather, Government policy, and more can all also have an impact on cash flow. You should learn to spot these warning signs.
Step 9: Be Honest and Realistic
This final step particularly applies if you regularly face cash flow problems in your business. If you do, you should honestly assess the position of your business, possibly by going back over the previous steps. You might not have enough sales, for example, or your cost base might be too high. Be realistic about what you can achieve and then put a plan in place to address the problem.
Conclusion:
Cash flow management depends upon financing and not on measuring profits. The positive result of operating activities reflects the company’s operational performance.
Measure the essential cash flow rates that help in the effective decision-making process undertaken at small and medium-sized enterprises. The company needs to have enough cash on hand to float its operations for the duration of the collection period. Because when the business goes out of cash, operations will simply cease.
With this in mind, businesses have to pay special attention to their cash cycle which covers the gap between receivables and payables to remain sustainable.
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