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Cash Flow Management: Techniques & Tools

Cash flow
Cash flow management is an important business practice for balancing costs and revenue.
Credit: Ufuk Zivana | Shutterstock

Cash flow management is a term used to describe the practice of balancing income to expenses. Companies can’t spend money they haven’t yet received, which means they need to appropriately project when they anticipate receiving cash as part of a sales, investment or contract, and have that money in hand for expenses as they arise. Cash doesn’t always arrive in time for bills, a problem that disrupts the progress of many businesses.

Cash flow basics

Cash flow entails the movement of funds in and out of a business. This information should be tracked on a weekly, monthly or quarterly basis to identify where a business is currently from a financial standpoint and where it will be several months in the future.

Positive cash flow. This means the cash coming into your business — sales, accounts receivable, etc.— exceeds the amount leaving through expenses, salaries and accounts payable.

Negative cash flow. This means the cash going out of your business is greater than incoming cash.

Positive cash flow doesn’t happen at random. Companies have to work at it and manage cash effectively to control the inflow and outflow of funding.

Projecting cash flow

Knowing when you’ll receive and need to spend money is part of the budget process. The budget process, ultimately developed to help anticipate and create strategies for funding during shortages or investing during surpluses, helps a company know how much it will receive and spend at any point in time. Cash flow projections follow a similar structure to that of a company’s budget.

To successfully project cash flow, organizations look at their prior year’s checkbook as a basis of cash flow for the following year. Adjusting for any anticipated changes, this is often the more accurate way of projection. When looking over a previous year’s expenses, a company would then factor in changes like new pricing, program offerings, funding sources and interest rate changes.

As the year unfolds, a company then updates cash flow projections to adequately reflect recent developments in expenses and profits. Comparing budgeted cash flows to actual deposits and expenditures will help in more accurately projecting cash flow in the following months. Even the most practiced of organizations find their forecasts change on a regular basis, thus prompting frequent revisiting.

Addressing cash shortages

For many small businesses, staying on top of cash flow management is a difficult thing, especially with the number of expenses faced each day. In the event of a cash flow deficit, companies have a number of finance options to work through difficult times until deposits start to come in. The following practices are quite common among businesses of all sizes:

  • Apply for a loan from a banking institution or individual
  • Apply for a line of credit from a banking institution
  • Speed up the collection process
  • Finance the purchasing of equipment through leasing or loans
  • Liquidate assets
  • Delay payments to vendors

The last point is often the most popular simply because of the options available to businesses. Many expenses can be delayed in payment if a consensus is reached between the debtor and vendor.

Maximizing use of projected cash surpluses

An organization won’t always find itself encountering debts before revenue is generated. In some cases, an organization may expect a revenue surplus in a cash flow projection. What the company does with that money can affect future opportunities, which means the money shouldn’t be spent or left sitting around. Instead, accountants recommend that companies make the money work for them. This can mean anything from making short-term investments like U.S. Treasury Bonds and money market funds to putting money toward paying off debts like loans sooner. This way the money will manifest its use through generated interest or shorter loan terms.

Coaching and software

Small and large businesses alike have a wide range of resources available to them in dealing with cash flow management. Smaller businesses may need financial management coaching to understand how to properly track cash flow, and companies like DaveRamsey.com, Berkshire Hills Financial and Osprey Money Management are popular resources for the learner. These services offer not only financial coaching, but also online courses, calculators and additional tools to help you track finances independently. Or, if you simply need a software solution to track money, accounting software like Sage One, FreshBooks or Harvest are capable of producing cash flow statements.

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