The Ultimate Cash Flow Guide

Chapter 3: Cash Flow Management


What is cash flow management?

Cash flow is the measurement of net cash and cash equivalents flowing in and out of your business during a specific period of time. Cash flow indicates whether a company is able to pay its current liabilities and is an important aspect in determining the company’s financial health.

Cash Flow Management Basics

What is cash flow analysis?

Cash flow analysis is the financial record of your company’s cash inflows and outflows over a specific period of time. Your cash flow analysis is an important internal process to help you understand the health of your business, and it might also be requested by potential investors as part of their evaluation. Strong businesses make cash flow analysis a regular habit.

What is a cash flow budget?

A cash flow budget estimates your cash receipts and expenditures for a specific period of time in the near future. Preparing a cash flow budget, or cash flow forecasting, helps you identify negative cash flow situations in your near future so you can proactively use cash flow solutions to prevent it.

Why do people say cash flow is the lifeblood of a business?

People say that cash flow is the lifeblood of the business, or that “cash is king,” because cash is the common thread running through nearly every activity and resource at a business. You need free cash flow to run and grow your business through the purchase of inventory, capital assets and investments, and the acquisition of talent. Without free cash flow you cannot meet obligations to suppliers, pay your employees, or expand operations. A shortage of cash isn’t the end of the world; businesses can still meet many of their obligations while operating in a period of negative cash flow.

Who manages a business's cash flow?

In sole proprietorships and small start ups, as the owner, you will almost certainly need to manage your business’s cash flow with the help of cash flow forecasting tools and software. Once a finance team is in place, they will do the work of preparing cash flow statements, which you and/or the executive team should review regularly as part of an ongoing cash flow management strategy. Some businesses hire a part-time controller to help manage cash and payments.

Can cash flow management affect our financial performance?

Absolutely. Regular cash flow analysis and management are critical to your company’s financial performance, growth, and even reputation. The inability to meet your financial obligations can cripple your business in a number of ways; from preventing investment and growth, to hurting your employees, to causing your suppliers to stop doing business with you.

How does stable cash flow help with growth?

Stable cash flow is key to your business’s growth and ability to plan ahead. Cash flow can help with growth by attracting investment, funding new equipment and capital asset purchases, increasing payroll to help you attract and retain talent, covering an expanded inventory, and more. A stable cash flow lets you respond to problems quickly and with ready, available capital.

As an individual, just having the reassurance of a stable and predictable cash flow can present serious benefits to your ability to think strategically and plan ahead. A cash flow problem is typically a short-term crisis, which can distract you from thinking strategically and taking calculated risks to grow your business.

How does your cash flow affect your customers?

You might be surprised at the number of ways your cash flow can affect your customers. With positive cash flow you can scale to meet demand. You can ship sooner. You’re more able to extend credit to your customers. You can honor payment terms, or even look the other way if a payment is a bit late.

Conversely, negative cash flow might mean losing key accounts, the inability to fulfill a large order, or having a supplier cancel a customer’s order because you are behind on payments. Having too little cash could mean you’re understaffed and unable to provide adequate customer service.

How does your cash flow affect your suppliers?

The most direct way your cash flow affects your suppliers is that it dictates your ability to pay outstanding invoices. Just like you, your suppliers (especially those in small businesses) need positive cash flow to meet their financial obligations and grow their business. Without cash you’re unable to meet those obligations, unable to re-order, and unable to give them a chance at stable cash flow themselves. Your relationship could suffer if your cash flow impedes your invoice payments.

On the other hand, having cash available might mean you can buy supplies in bulk at a discount. You can pay invoices early for a discount. You can place larger orders yourself and help your suppliers grow. You could just put a smile on their face, too!

How do late payments affect cash flow?

Any business has inflows and outflows – when outflows outpace inflows it creates a cash gap. While waiting on invoice payments you don’t have that cash available to fund activities, meaning you’re short for your own obligations. It’s possible to create a bit of a ripple effect throughout the supply chain if one payor pays late. Late payments are one of the top reasons small businesses operate with a negative cash flow.

How do payment terms affect cash flow?

Payment terms tell your customers how long they have to pay your invoice. You might require that all invoices are “Due On Receipt,” or you could extend a period of credit to your clients with Net 30, Net 60, Net 90 or even longer payment terms. However, you won’t have that free cash flow to buy inventory, pay your employees and suppliers, or invest in growing your business unless you solve that negative cash flow with a tool like invoice funding.

What's the difference between managing cash flow as a small business and as a large corporation?

Large corporations are more likely to have reserves and greater liquidity, enabling them to withstand longer periods of negative cash flow from operations. Small businesses, on the other hand, rely on free cash flow across operations, investments and financing in order to not only grow but survive.

What causes a cash flow gap?

A cash flow gap is caused by more money leaving your business than you have coming in over a specific period of time; inflows and outflows. Consider a case when you have $8,000 in outstanding invoices due for payment on the 15th, but you need to pay your suppliers $5,000 by the 10th: even with more money in receivables than in payables, you simply won’t have the cash to meet your obligation on the 10th. You run a high likelihood of facing a negative cash flow situation where you do not have the cash to pay your liabilities. 

How do I manage a cash flow crisis?

Managing a cash flow crisis requires an immediate injection of cash, to allow you to resolve your current liabilities and meet all of your financial commitments. Selling capital assets or investments creates liquidity, but these activities can negatively impact your long term ability to generate revenue. That’s why more entrepreneurs and founders are turning to invoice funding, to create free cash flow out of outstanding invoices.

What are the best practices in cash flow management and reporting?

The top cash flow best practices include invoicing customers immediately following orders, using short payment terms, incentivizing early payment, following up on outstanding invoices, and paying your own bills on time. Automating your invoicing and processing is a great idea, so you can stay organized and improve your cash flow easily and often.

How do small business owners manage cash flow?

Small business owners manage cash flow on an ongoing basis by forecasting cash flow and making sure they’re collecting enough payments from revenue generating activities to cover their expenses. Despite their best efforts and intentions, this simply isn’t always possible. When cash flow is negative in the short term, solutions like cost cutting and invoice funding can help. Over the longer term, invoice funding can ensure a steady stream of operational cash flow, freeing up funds for investment, inventory and assets, and other revenue generators.

What are cash flow management strategies?

Cash flow management strategies are the steps you take to forecast cash flow, monitor cash flow on a regular basis, and solve for any issues that arise.

Why should we have cash flow management policies and procedures in place?

You should have cash flow management policies and procedures in place to take the guesswork out of solving negative cash flow. Having a prescribed set of tools you can use when negative cash flow appears in your forecast allows you to quickly resolve the issue and get back to doing what you do best: running your business.

What are some cash flow management strategies for small business?

Cash flow forecasting, invoicing immediately and using short payment terms, monitoring expenditures, and invoice factoring are all effective cash flow management strategies for small businesses.

What are the best cash flow management models?

The best cash flow management model is the one you’re actively involved in. Even if you have an accountant or bookkeeper to manage your financial records, make sure you are regularly seeing a cash flow forecast so you can anticipate potential cash flow issues and put your management strategies to work.

What are the best cash flow processes?

The best cash flow processes are: a) cash flow forecasting, to keep you one step ahead of negative cash flow issues; b) a cash flow management strategy with pre-approved policies and procedures, to empower you to prevent or resolve negative cash flow quickly; and c) cash flow solutions like invoice factoring, to give your business an immediate injection of cash for payroll, supplier invoices, and growth activities.

How are effective costing, cash flow management, and budgetary control connected?

Effective costing is critical to the financial health of your business, your cash flow, and your ability to turn a profit. Budgetary control is necessary for keeping your expenses in check. Your cash flow forecast tells you whether the revenue you’re generating from your sales and other activities is sufficient to cover your expenses in any given period of time. If you are consistently experiencing negative cash flow or failing to turn a profit, your costing and expenses are two areas you’ll need to investigate.

How can you pay taxes and still maintain a steady cash flow?

Speak with your accountant about your tax strategy to come up with ways you can remove your tax withholdings and obligations from your free cash flow. This prevents you from mistaking tax withholdings from cash flow. If you need an immediate source of funds to make a tax payment and are waiting on payment from clients, you can use invoice funding to cover the gap in your cash flow.

Where can I learn how to manage cash flow day to day?

Work your way through our Ultimate Cash Flow Guide, practicing the cash flow forecasting and management techniques you learn along the way. If you find yourself craving an in-depth, instructor-led course, try Running a Profitable Business: Understanding Cash Flow. It’s led by Jim Stice, Distinguished Teaching Professor of Accounting in the School of Accountancy at BYU, and Earl Kay Stice, PricewaterhouseCoopers Professor of Accounting at the Marriott School of Management.

Can you manage cash flow in Excel?

Yes. If you input all of your current invoices and receipts for a specific period into an Excel spreadsheet, you can manually forecast your cash flow. Use the following formula, and see Calculating Cash Flow for more.

Operating Cash Flow Ratio = Cash Flow from Operations / Current Liabilities

Where can I learn how to automate cash flow?

Automating your cash flow forecasting and management can free up time for you to look into your cash flow more often, helping you to make smarter decisions about your business. You can automate other aspects of your cash flow, as well; for example, enabling direct deposit and making bill payments online can help you move cash around faster. You can learn how to automate cash flow in different ways throughout our Ultimate Cash Flow Guide.

Where can I learn how to systematize cash flow management?

Managing cash flow on a PC is possible using Excel. Managing cash flow on a Mac gives you the option of using Numbers, and with either a PC or a Mac, you can use Google Sheets or a similar cloud-based spreadsheet software to input your sales and expenses, to calculate cash flow. You can further automate your bookkeeping and produce meaningful financial records using software like QuickBooks or Simply Accounting. QuickBooks offers a tutorial on how to prepare a cash flow statement here.

What are the steps to better cash flow management?

  1. Practice cash flow forecasting regularly.
  2. Develop and implement a cash flow management strategy.
  3. Create cash flow policies and procedures to guide your solutions to different types of cash flow issues and save time when you need it most.
  4. Use cash flow management solutions like invoice funding to ensure that you always have steady positive cash flow to pay your bills, attract new investment, and grow your business.
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Tips for Improving Your Cash Flow

What are the most common cash flow problems?

The top business cash flow problems can dramatically impact your ability to grow, and they’re more common than you may think. Negative cash flow happens when a business is putting more cash out than it is taking in, often due to out of sync credit terms. When a business extends longer terms to its customers than it receives from its own suppliers, a cash gap appears during the difference in those payment terms. Other common cash flow problems include an inability to pay immediate liabilities, inability to move inventory, short-sighted decision-making and an inability to grow the business.

Where can cash flow problems cause difficulties?

Cash flow problems cause difficulties in every facet of your business, from affecting payroll to causing missed supplier payments to giving investors cause to doubt your business planning.

Why do small businesses have cash flow problems?

Small businesses often have cash flow problems because they haven’t yet been able to put money aside for reserves. Growing your company requires that you constantly invest funds back into the business. Small businesses might also have more stringent payment terms with suppliers than they are able to extend their own customers.

What are the top causes of cash flow problems?

Cash flow problems occur when your company’s cash output is greater than your inputs. Top causes of cash flow problems include late or slow invoice payments, necessary capital expenses and investment, a lack of forecasting and planning, carrying excess inventory, disorganized bookkeeping and more.

Where can I learn how to diagnose business cash flow issues?

You can learn how to begin forecasting your cash flow here. Making cash flow forecasting a regular and integral part of your business planning helps you foresee and diagnose cash flow issues so you can take a proactive approach to solving them.

How does a positive cash flow improve a business?

Positive cash flow improves your business by not only enabling you to meet your current commitments, but also by freeing up funds for growth-positive activities like investments in talent, equipment and inventory.

How can cash flow be improved?

Learning how to improve cash flow may be easier than you think. Once you’ve incorporated cash flow forecasting into your routine, you’ll be able to see your cash flow needs and any potential shortcomings in advance.

What are cash flow strategies?

Cash flow strategies help you manage your cash flow, to ensure you’re always able to pay your bills and maintain the growth of your business. Once you recognize a potential shortfall, cash flow strategies like asking for a deposit, requesting longer payment terms from your suppliers, or invoice funding can help prevent negative cash flow.

How can cash flow problems be overcome?

The key to overcoming cash flow problems is prevention. Cash flow forecasting helps you identify potential shortfalls and understand their causes, so you can proactively find solutions.

How can the worst cash flow problems be solved?

Typically, the worst cash flow problems are solved with an immediate injection of cash into your business. A cash flow solution like invoice factoring can get you through a negative cash flow situation without having to sell off capital assets, miss payroll or jeopardize your valuable vendor relationships.

How can you help your customers' cash flow?

Depending on your company type and the unique needs of your business, you may be able to help your customers manage their cash flow by offering more flexible payment terms. However, your top priority must always be keeping your own cash flow positive, so you can grow your business.

How can you help your suppliers' cash flow?

Your suppliers, especially if they are smaller businesses, may experience cash flow issues of their own. You can help their cash flow management by paying your invoices promptly, which of course requires that you have your own cash flow management under control.

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Cash Flow Management Tools and Applications

Are there short term and long term cash flow solutions?

Yes. Long term cash flow solutions require that you identify the causes of your negative cash flow and correct those issues, but that doesn’t solve your immediate need. Be careful to avoid short term solutions that impose payday loan-style fees on small businesses for one-use loans. An invoice factoring solution designed specifically for businesses like yours smooths over the gaps in your cash flow with 24-hour invoice funding, low fees, and repayment terms that allow you to grow while solving your short term negative cash flow.

Why do we need cash flow forecasting tools?

When it comes to your cash flow, an ounce of prevention is definitely worth a pound of cure. You can manually calculate your cash flow forecast in Excel if you have time. Or, try more powerful, automated cash flow forecasting tools to save time and enable you to run different types of projections. A subscription-based option like DryRun, for example, lets you run if/then scenarios to measure the impact of different activities on your projected cash flow.

What are the top cash flow tools?

The top cash flow tools close the gap between invoicing and your receipt of cash for that invoice, enabling you to carry on with the important business activities that help your company grow. Top cash flow tools like FundThrough solve for small business negative cash flow and empower entrepreneurs to focus on running their business, instead of trying to collect payments.

Are there free cash flow solutions?

Absolutely. In fact, FundThrough accounts are free forever, with an innovative repayment structure designed to suit the unique needs of small businesses. You pay a small fee for our invoice factoring service, which funds your invoices within 24 hours rather than making you wait 30, 60 or 90 days for client payment. Right away, you can process payroll, buy inventory, advertise and more.

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The Ultimate Cash Flow Guide

This guide for small businesses will teach you how to manage your cash flow problems through various financial solutions.