Cash Flow Management: Techniques and Tools
  • Cash flow management involves understanding upcoming expenses and comparing them against accounts receivable and future sales.
  • To project cash flow, analyze your prior year's numbers, then adjust for anticipated changes, such as new pricing, more personnel and funding sources.
  • By understanding cash flow techniques, you'll come to predict cash flow and can get ahead of the market.

If you're a business owner, it's essential to track and understand your cash flow; you need to know how the amount of money you bring into your business compares to the amount going out. If you're spending more than you're earning, you need to make changes to avoid going out of business. 

"Put simply, cash flow is the money that will be coming in and going out of the 'register,'" said Ron Pac, a financial planner at Barnum Financial Group. "Managing cash flow means understanding upcoming expenses and comparing them against accounts receivable as well as projected future sales."

It's important to regularly track the movement of funds in and out of your organization to determine the financial status of your business and what it will be in several months.

Cash gives our business power – the power to hire the best talent, purchasing power for the goods and services we need to grow to take advantage of new opportunities that may arise.

Cash flow management involves understanding upcoming expenses and comparing them against accounts receivable and future sales. Essentially, it's monitoring the money coming in and out of your business and understanding how much revenue and expenses you have.

In other words, do you have enough money to pay your bills this month? That's one of the important questions to ask when you're involved in cash management. If your company overspends, it ultimately doesn't matter how much revenue you're pulling in. 

Here are a few key terms you'll want to be familiar with:

  • Accounts payable: the money a business owes its suppliers
  • Accounts receivable: the money your customers owe
  • Terms of payment: the conditions of invoice payment, including the time given to pay and the frequency of payment
  • Burn rate: the rate at which your business is consuming available cash
  • Negative cash flow: when the cash leaving your business is greater than the cash coming in
  • Positive cash flow: when the cash coming into your business is more than the money you're spending
  • Shortfall: a deficit of expected income or profits

Determining when you'll receive and need to spend money is part of the budgeting process. To successfully project cash flow, you can look at your prior year's numbers as a basis of cash flow for the following year. Then, adjust for anticipated changes, such as new pricing, more personnel and funding sources.

As the year unfolds, you should update your cash flow projections to accurately reflect developments in expenses and profits. Comparing budgeted cash flows to actual deposits and expenditures will help you predict cash flow later.

Another strategy is to add the cash you already have to the cash you plan to receive. Then, add up how much of that money you plan to spend.

Even the most successful organizations find that their forecasts change regularly, so it's important to monitor your cash flow.  

There is a wide selection of tools and software that make it easy to track your business's money. If you're not interested in taking the time to understand the software, you may want to work with a professional accountant. 

Sales are obviously the best way for a business to gain cash flow. If you're not generating sales, you're not really a business. Of course, saving money in operational expenses helps, too. It's important to have detailed budgets and to curb unnecessary spending; even C-suite executives shouldn't be wasting money.

In the event of a cash flow deficit, companies have a number of options, including the following:

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

Sometimes, however, you may have a surplus of cash. That money can affect future opportunities, so you don't want it to sit around.

Accountants recommend that you make the money work for you. You can do this by making short-term investments and using the money to pay off debts faster. That way, the money will benefit you through generated interest or shorter loan terms.

Understanding cash flow management is vital to the success of your business. If you can accurately project cash flow, you will steer your business in the right direction.

If you understand cash flow techniques, you can get ahead of the market. You'll even predict cash flow, because you understand the revenue cycles of customers, vendors, suppliers and contractors.

Every business has high seasons and low seasons, and understanding upcoming expenses for employee overtime, replacement equipment and other needs goes a long way.

The ways an Accountant Can Save Your SME Business Money