What is Cash Flow Management?
Cash flow is the process by which money flows in and out of a business. Proper management of cash flow can help ensure business solvency, improve profitability, and can help lower the risk of fraud; it requires being aware not just where your business has been but also where your funds are going to be. Fintalent’s cash flow management consultants achieve this through the use of cash management methods, a very broad term that covers all the ways you control how cash comes into your business, where it goes and what it is used for. A simple list of business activities could include: setting aside plant and equipment purchases; setting aside tax payments and prepayments; preparing financial statements that track cash flow through their use of specific terms or ratios such as “current assets” or “total assets.”
Cash flow management is not just about managing money going in and out of your business but also over time, when comparing one period to another. Many businesses, particularly retail businesses look at “cash conversion cycle” as one measurement of how well they are managing their revenue and expenses. Cash conversion cycle is the amount of time it takes to collect revenue or pay expenses. You can use this comparison over time to show what part of your business requires more attention or has a higher risk factor compared to other areas. You can also see how changes in the business affect your cash flow requirements such as changes in sales and expense forecasts.
Cash flow management is not just about measuring but also involves planning for future requirements. While some businesses may look at it as the management of funds, many modern organizations use a broader definition and looking at the techniques and tools of cash flow management to help manage cash flow. It can be thought of as a broader term than “budgeting” and includes various techniques for improving cash flow in your business like vendor payment terms that require prepayment or other types of collection management.
Conducting Cash Flow Management
The actual practice of Cash flow management has evolved as technology has evolved and organizations have become more sophisticated in their management of cash flows. Cash flow may be calculated using a variety of different methodologies and tools. One of the most commonly used methods is through the use of ratio analysis, wherein an asset or liability is compared to a specific figure such as net income and that figure is then used to predict future cash flows for any asset or liability. This process requires the use of an accounting tool such as QuickBooks that has some advanced features specifically tailored to giving users this capability.
Many businesses also utilize forecasting techniques in their CFO role and are more involved in managing cash flow than just collecting it. As a result, many CFOs would also become responsible for company budgets, as well as overseeing other areas of management including inventory management or supply chain management. Organizations that are particularly concerned with the management of cash flow in other areas such as finance or risk will often use a combination of methods and tools to attain these goals.
The management of cash flows is not something that you can perform by yourself and needs to be done by specialized people within or outside the business, the type of which depend on the nature of your business. You may have internal staff members who are employed specifically for this purpose or outside consultants who have been trained in this area. You may also have separate departments within your organization, such as sales and marketing or supply chain, that handle these functions keeping them apart from other business functions.
Why Adopt Cash Flow Management?
The management of cash flow is something that you should consider looking at if your business is struggling or not doing as well as it could, particularly if you rely on outside funding or need to finance long term projects such as projects that contribute to growth. Cash flow management will help you evaluate areas of the business that are contributing to the business cycle.
Especially if you are a cash-strapped business, it is important to keep track of all the money that flows into your business and out of your business. That’s where cash flow management comes in – to help you track the movement of money in and out.
Calculating Cash Flow
The key to running a successful cash flow management program is tracking how your account balance changes over time. You will want to track: accounts payable, accounts receivable, and net income. You can easily calculate the net income by subtracting accounts payable from accounts receivable and adding back depreciation, amortization or other non-cash charges.
To calculate net cash flow, you must also track net income and accounts receivable and accounts payable. From the example above, you can see that the accounts payable balance decreased by $10K because of the customer payments of $20K, while the balance of accounts receivable increased by $10K. This results in a net cash flow increase of $10K, which was needed to cover payroll expenses or to grow the business.
Cash flow management is one aspect of financial management that involves monitoring both incoming and outgoing monies for a certain time period as well as comparing that information with prior time periods. The goal of cash flow management is to ensure that your cash account always has money in it. By keeping a steady flow of money coming in, your company will never have a negative balance. If the cash account is not always at least at zero, then the business is not generating enough profit to cover expenses or paying out too much in bills. Even if you have other accounts that are positive, such as an investment account or a checking account, having a negative balance in your cash account can cause problems with short-term debt payments and other obligations.
Managing your cash flow is a key part of any business. You need to understand how much money you have coming into the business and how much money is leaving the business so you can plan for the future.
Determining Cash Flow and Cash Intake from Cash-Based Revenue For many businesses, cash revenue is an important part of their operations. You will want to calculate cash intake at least monthly in order to see how much profit your company is making. The sales of each product or service are listed on the cash receipts journal. If you use this method, you will also want to take the time and number of hours it takes your employees to process payments, which can seriously impact your revenues and profits. You may need to address this before you implement other techniques or methods of managing cash flow.
Cash Flow From Accounts Receivable Many businesses with a lot of accounts receivable begin to see problems when they don’t consistently capture payments, especially in the months after a sale has been made. If your business does not capture all the payments, it can lead to revenue losses and negative cash flows. This is why most businesses purchase credit card processing in order to collect payments as soon as possible. You will also want to consider using a point-of-sale system that keeps track of sales by employee and calculates sales taxes, which are included on the receipts and help calculate your net income.
Managing Your Cash Flow
When you manage your cash flow, you are doing many of the same calculations that are involved with calculating your business cycle. However, when you manage cash flow, you look at all the transactions that affect cash over a certain period of time. In order to do this, you will need to collect information from all areas of the business, such as accounts payable and accounts receivable from sales. You will also want to calculate any amounts of income or expenses not included in your business cycle calculations. This allows for more accurate management and helps avoid problems with cash flow in the future.
A cash flow management system consists of many types of information that is constantly recorded by the system. The system ensures that all transactions are recorded with each type of account, even if the entry is done manually. This can be helpful when a business owner wants to run reports on metrics such as sales and expenses for particular periods or specific categories. It can also help work out problems with cash at particular times.