Cash Flow Management: Basics, Tips, and Best Practices

The main reason why most businesses fail is because they are not able to manage their cash flow properly. So, this issue cannot be neglected.

A regular income is the lifeblood of any organization, so that it can pay its employees, pay its bills, and invest in its growth.

Therefore, cash flow management is very important to understand where your money is coming from and going to, and to predict how much income will be available for future growth.

In this article, we will answer some of the most common questions about cash flow management for small businesses, such as what is cash flow management, what benefits can it provide, and what can be done to improve cash flow, along with our guidelines.

What is cash flow management?

First, let’s define what cash flow is. Cash flow refers to the total amount of money coming into a business and the total amount of money going out of a business. In other words, it refers to the actual cash on hand, income and expenses.

These cash flows are naturally divided into (3) main types. These three types are usually clearly stated in the Statement of Cash Flows.

Cash Flow from Operations (CFO)

• This refers to the cash inflow and outflow from regular business activities, such as the production and sale of goods. It is the income and expense that is directly related to the main business.

Cash Flows from Investing (CFI)

• It shows how much income was earned or spent from investments during a given period. For example, long-term investments such as buying new equipment, building buildings, etc.

Financial Cash Flow (Cash Flow) Flows from Financing (CFF)

• This refers to the net cash flow used to finance or operate a business. For example, borrowing, selling shares, or paying down debt.

Cash flow management is the process of constantly monitoring and optimizing your business’s cash flow over a given period of time. 

To put it more simply, it compares the amount of money you receive—such as revenue from sales—with the amount you spend—such as paying bills, salaries, and taxes.

It’s important to note that cash flow is not the same as profit. Profit is the money left over after deducting all the costs of producing a product or service. Cash flow looks at the actual amount of money coming in and going out.

If the difference between the cash coming in and the cash going out at the end of a given period is negative, it means that the balance at the beginning of the period is less than the original balance. This is a concern for the business.

So the goal of cash flow management is to prevent this from happening, to constantly record and optimize your cash flow, and to make sure your cash inflows are always greater than your cash outflows. 

That surplus will help you invest and expand your business. There are also many other benefits that small businesses can gain from good cash flow management.

Benefits of Cash Flow Management

Let’s look at 7 key ways that cash flow management can benefit your business.

1. Paying your employees on time

• • Your employees are the lifeblood of your business. Paying them on time is essential to maintaining loyalty and attracting talented people. A solid cash flow management system ensures that you have enough money to pay your employees.

2. Purchasing the right materials

• • Being able to purchase the raw materials or services you need to fulfill your orders on time is another benefit of cash flow management. This is because it helps you predict your Account Payables. If you have a surplus, you can even expand your product line.

3. Paying all other expenses

• • Whether it’s paying taxes, paying off loans, or paying other bills, good management is the key to the future. You can record current and future expenses. So you can plan carefully so that you can pay them on time.

4. Plan and coordinate activities to maximize profits

• • Planning is important for a business and if not done, it can lead to losses. One of the benefits of management is that it helps you analyze business performance and plan to maximize profits from current activities. It also helps you prepare financial budgets for the coming years.

5. Be able to reserve money and avoid overspending

• • Without strong management, you will not be able to monitor how much you are spending, and you may end up spending more than you need or using money that is needed elsewhere. Cash flow analysis can help you determine whether your business is stable, in surplus, or in need. Cash flow forecasting can help you control your spending, determine your liquidity and profitability, and ensure that you have enough cash reserves for unexpected expenses or bad debts.

6. Expand or grow your business

• • Another benefit of management is that it helps you prepare your business for investment and growth opportunities. It helps you understand your income and expenses, determine your current financial situation, and make budget decisions. For example, if you have extra money, you can create new products or expand into new markets.

7. Get a business loan

• • Most businesses rely on banks or financial institutions for some of their operations. When you need money, you can approach them for a loan. Banks will carefully study your business’s financial situation and repayment capacity before granting you a loan. Management will provide you with a record of your cash flow and provide you with accurate details of all your income and expenses.

In short, good small business cash flow management will give you peace of mind that you can meet all your obligations, run your business more efficiently, and focus on growing your business.

Also Read: How to Prepare a Cash Flow Statement for Your Business

Tips for Improving Cash Flow

Here are some tips to help you stay financially healthy and avoid cash flow problems.

1. Regularly forecast your cash flow: Calculate your expected revenue (how much sales will be made, etc.) and your expected spending (how much you will spend, how much inventory you will need, etc.). This will help you make informed decisions about what to do next.
2. Thoroughly vet potential buyers: Thoroughly research potential new buyers. Check their creditworthiness through financial ratings, local peer reviews, or other methods.
3. Manage Late Invoices (Avoid Bad Debt): Follow good credit control practices to avoid bad debt. Send out invoices to buyers as soon as possible, set clear payment terms, Get your money faster by setting up a process to get it in on time and setting out what to do about unpaid bills.
4. Be aware of potential risks: Be vigilant about potential threats, including creditors, unusually large bills, and missed payment dates.
5. Avoid overspending and only make sound investments: Always consider how it will affect your finances before making a big investment or expanding your business. Study the industry or market conditions carefully.
6. Set aside cash: Make sure to set aside a portion of your income to cover unexpected liabilities.
7. Train your team: Teach your employees basic credit control principles for better management (or hire people who know them).
8. Use digital management software: Use digital software that can record invoices and expenses and provide a clear picture of your financial situation.

Despite all of this, you should also consider purchasing trade credit insurance to protect your business from credit risk. This insurance protects your cash flow by guaranteeing your receivables for the next (12) months, helping to prevent bad debts, and providing compensation if they occur. It is one of the best ways to strengthen the management of your small business.