Cash flow management is the process of monitoring and controlling the flow of cash in and out of your business. As a business owner, you need not only to track the movement of money (that is, money paid out, and money received) within the business, but you need to use the information gathered through the tracking to control that movement. Why do you need to control the movement of cash within the business? Because good cash flow ensures that you have enough money to run the business. When there is no money to run the business because there is too much money tied up in inventory or unpaid monies from debtors, then the business may come to a standstill, and that, as they say, is bad for business. Cash inflow into the business may be from the following sources: money received from customers, money from investors or interest earned. An outflow of cash may be payments made to suppliers or creditors, repayment of loans or payment of utility bills. Since there is always money flowing in and out of business, a cash flow management process is (or should be) a continuous process.Besides, you could invest in such cash flow management tools as QuickBooks, CashAnalytics, PlanGuru, and so on.
The Dangers of Not Doing Proper Cash Flow Management
If as a business owner you do not have some cash flow management strategies to monitor the inflow or outflow of cash in the business, you may encounter the following problems, (which in turn will have an adverse effect on the running of the business):
- One problem that may arise from not doing proper cash flow management is lack of funds to pay outstanding utility bills or the daily expenses necessary in the running of the business, causing operations to stall, and thus affecting the performance of the business.
- Payment of essential monthly expenses like rent, salaries or loans may become strained if cash is not available exactly when required.
- Payment to creditors is an uphill task when you do not have good management of cash.
- Calculation of profits made is a challenge without proper cash flow management. Since there may be too much money tied up in stocks or unpaid debts, calculating actual profits and calculating debts and bad debts is either hard or impossible. As a result, there may be overcast or undercast of actual profits.
- There may be inaccuracy in calculating actual expenses. If there are late payments, there may be extra charges that are hard to predict.
- There may be a problem settling statutory payments such as licences or tax without proper management of cash flow.
- Emergencies may be hard to handle when there is poor cash flow management.
- Money meant for specific business uses may be diverted if there is poor cash flow management. Good cash flow management helps to set aside funds received so that it is available when needed.
How To Do Cash Flow Management
With a cash flow management strategy being such an essential part of a business, it is vital to know what to do as a business owner to ensure that you are doing an excellent job in managing the flow of cash within the business.
- First, ensure that there is a clear division between personal finances and business finances, to keep track of your business finances with ease.
- Keep your records up-to-date. Good record-keeping will help you keep track of sales, unpaid invoices, collections, money banked, purchases, cash in hand, utility bills due, bills expected, fixed monthly payments and their due dates, supplier payments due. These records are of extreme importance in mapping cash expected into the business and money available to pay out of business at any specific time.
- Use the records to maintain books of accounts. Books of accounts act as a transparent financial representation of the various parts of the business. Think of an architect doing a house plan. The books of accounts also help you gauge the performance of the business, and actual profits or losses made. Relying on cash flow without proper records will almost certainly lead to losses or misallocation of funds. It is important to record each transaction as soon as it happens always to portray the correct business position and to avoid omissions due to forgetfulness.
- Be very keen on collections from debtors. No matter how keenly you track unpaid accounts, if there is a consistent case of large amounts of uncollected cash outside the business, it will hurt the cash flow.
- If necessary, negotiate better payment dates with suppliers.
- Keep inventory at a minimum level unless you have a confirmed surge in orders. Too much inventory in stores slows ties down cash.
- Have a line of credit or a fall-back plan in case you need extra cash urgently.
Benefits of Good Cash Flow Management
Proper cash flow management ensures that business always has cash available to run its operations. The following are the benefits or advantages of having good cash flow management in your business.
- In case you need more inventory or cash to fulfill orders, it is readily available. Failure to fill orders (or delay in filling orders) is one of the main reasons many businesses lose not only money but customers or clients.
- Proper cash flow management helps avoid an escalation of debts. Debts are expensive to maintain, especially when they pile up.
- Peace of mind: a business owner with cash at his/her disposal has peace of mind. Lack of operating cash in a business is a cause for continued stress and strain.
- Business expansion, handling an order surge and taking care of emergencies is more comfortable with good cash flow management. The reason is that the owner knows the cash the business can raise at a specific time.
- Problems such as unpaid salaries or rent are avoided, ensuring a smooth running of the business.
- It helps s avoid spending too much money and also avoid the temptation diverting funds to other areas not directly related to the business.
Having proper cash flow management techniques is, therefore, a fundamental policy for any business, and if you are a business owner, you should take it upon yourself to practice proper cash flow management. It might be the difference between success and failure, or the difference between a smooth stress-free business and a stressful, struggling business!