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:
What are the 3 steps to an effective cash flow management system?
Why is knowledge of cash flow management especially critical for small businesses?
What are the top common cash flow problems small businesses face?
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.
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.
By implementing Plooto, long-dated receivables are substantially reduced if not eliminated.
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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.
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.
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:
The following three activities are essential to a successful cash flow management system:
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.
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:
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.”
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.
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.
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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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.
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.
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.
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.
CHAPTERS
00 The Complete Guide to Cash Flow Management for your Business
01 How Do You Manage Cash Flow in Business?
02 How Much Cash Flow Should a Business Have?
03 Why Are Cash Flow Statements Important for Business?