What is cash flow management?

Cash flow management is keeping track of the money you’ve got coming in and going out.

This goes beyond what’s currently in the bank, looking also at the money you’re owed by others, and any outstanding debts or scheduled payments you have.

It also includes taking actions to keep your finances healthy—both now and in the future.

You can do this for your personal finances, but in this article, we explore what managing cash flow means for your business.

We cover:

What is cash flow management in business?

When it comes to cash flow management in business, you’re still tracking money in and money out, but have different factors to consider and manage.

Your business likely has multiples streams of revenue, including sales, loans, shares, and profit on investments.

It also has more complex costs, such as paying wages, making products, marketing, tax, energy bills, and rent.

The motivations for good cash flow management are also different in business.

The people that work for you rely on the company’s finances for their livelihoods, and your profit margins can soar if your operations are sustainable and productive.

Why is cash flow important?

No matter what type of business you’re in, you can’t overestimate the importance of cash flow.

By managing it correctly, you’ll be able to keep your business secure and profitable, as well as achieve a range of benefits:

Forecast investment opportunities

Prepare for future opportunities with full visibility of your business’ finances.

With projected cash flow, you get a sense of what funds will be available and when, so you can make investment decisions at the right time.

Maintain credibility

Properly managing cash flow ensures you have the money to pay your employees and suppliers.

Not only is this essential for your business to operate, it all also boosts your credibility outside of the organisation.

This is important if you’re looking to attract investors or potential buyers, who will want to understand your business’ financial position.

Understand company spending

If you’re making investment and purchase decisions without properly managing cash flow, you’re limiting how much the business can grow.

If done correctly, you can build a solid expenditure profile to better understand where your money is going.

This helps you make vital decisions, such as where allocate more money, and where to cut unnecessary spend.

Build emergency cash reserves

The economy can change in what seems like an instant. Therefore, all businesses need access to cash so they can adapt when needed.

Managing your cash flow to keep finances firmly in the positive with a cash reserve means you can absorb the impact of any unexpected changes and adjust the course of your business quickly.

What are some business cash flow problems?

If you don’t closely track revenue and expenditure, you’re likely to run into some business cash flow problems.

These can put serious pressure on your business and, in worst case scenarios, threaten your ability to keep going.

If you end up with more cash going out than coming in—even temporarily—you might find yourself in one of these situations:

• Unable to pay employees.
• Unable to secure a business loan at a good interest rate.
• Unable to pay suppliers or order stock.
• Unable to fulfil customer orders.
• Unable to invest in rare opportunities.
• Unable to repay loans, incurring even more debt.

How to improve cash flow management

All businesses face cash flow issues at some point.

Maybe you have customers that are late in paying, you get hit with unexpected energy price hikes, or you experience a drop in sales when a new competitor enters the market.

If you do find yourself in a tricky situation, there are still ways you can turn things around.

Here ‘s what to consider if you’re wondering how to improve cash flow management:

Do some cash flow strategy planning

Build a dedicated cash flow strategy by setting strict budgets, identifying and reducing overspending, and building cash reserves for any unanticipated costs.

You can use scenario planning to determine how you’d react to drops in revenue and hikes in costs.

This where you also set financial goals, look for potential ways to save money, and manage the risk of any possible losses.

Set cash flow objectives

To build a solid financial foundation, you’ll need to be intentional with what you want your cash flow to look like.

By setting well-defined cash flow objectives, you can measure your progress towards improving cash flow management, and tweak your approach over time.

These objectives should also be shared within your business, so everyone knows what you’re aiming to achieve, and can help you get there.