Mastering Cash Flow Management: A Guide for Business Owners

To put it simply, cash flow is the movement of money into and out of a business, the money that ‘flows’ over a set time period. It shows how much cash the business is using, and how much it’s generating from sales. Cash flow includes a whole host of things, including money made from sales, investments and loans, as well as money leaving the business in the form of debt repayments, expenses and purchases. Below, we’ve taken a look at cash flow management and why it’s important.

The Main Types of Cash Flow

There are three main types of cash flow; operating cash flow, investing cash flow and financing cash flow. Operating cash flow refers to the money made from the business’ main operations, such as selling goods or providing services to paying customers. Investing cash flow refers to the money spent or earned from investments, including investments into assets, equipment and property. Financing cash flow refers to the money gained from investors or creditors, and any money paid back to them, such as loans.

As a business owner, you need to understand cash flow, especially how much money you have left after essential expenses. With this information, you’ll have a better understanding of your business’ financial stability and your ability to cover costs, invest in growth and handle unforeseen expenses.

Why is Cash Flow Important?

• It Helps You to Maintain Liquidity – When your cash flow is in order, you’ll find it a lot easier to maintain liquidity. This means being able to meet all of your short term financial obligations, such as paying bills and paying staff. If you don’t maintain liquidity, you might find it difficult to operate on a day-to-day basis. After all, staff aren’t going to work if you’re unable to pay them.

• You’ll Be Prepared for a Financial Emergency – There’s no knowing when your business will be faced with an unexpected cost, but effectively managing your cash flow ensures you have the money available there should you need it. You might suddenly have to pay out to repair equipment, or you might experience a drop in sales and need money to keep running until things pick up again. With cash flow management, you’ll be prepared for whatever comes your way, without having to worry about disrupting the business or putting plans on hold.

• It Helps You to Avoid Debt – When you have poor cash flow, you’re more likely to rely on loans and credit, which comes with a lot of interest. It’s not easy to keep up with the additional interest costs you incur, and this puts a strain on the financial health of your business. But, when you manage cash flow and have a healthy amount of money flowing into the business, you are less likely to depend on debt and the interest that comes with it.

• You Can Take Advantage of Growth Opportunities – When you have a healthy amount of cash at your disposal, you can take advantage of growth opportunities as and when they come up. This could mean expanding your current product line, entering a new market or investing in newer technology. If you’re not managing your cash flow effectively, this is a lot harder to do, as you’re unlikely to have the necessary funds available.

• It’s Easier to Make Financial Decisions – It’s a lot easier to make the right financial decisions when you have your finances in order. Analysing your cash flow will give you an idea of how much money you have to spend, how much you have coming in and what investments you’re capable of making. You’ll find it easier to forecast and plan your finances, and you’re less likely to make a decision that’s difficult for the business to keep up with financially.

• You’ll Keep Suppliers and Customers Happy – It’s important that you pay your suppliers on time, especially if you want them to offer you discounts, credits and better value contacts going forward. With cash flow management, you’ll find it easier to make sure that suppliers are paid on time. With suppliers happy, there’s less likely to be a delay in goods being sent to customers, which in turn keeps them loyal.

How to Manage Your Cash Flow Effectively

A lot of business owners assume that cash flow is complicated, but it really doesn’t need to be.

• Use Technology for Cash Flow – There’s a lot of accounting software out there to monitor cash flow, so utilise it. Technology will enable you to monitor your cash flow in real-time, automate billing and manage expenses.

• Create Cash Flow Projections – Create projects of what your future cash flow will look like, showcasing cash going into your business, as well as the money being spent. This will help you to plan ahead, as it’ll highlight any shortfalls ahead of time.

• Review Your Expenses – Regularly assess expenses to avoid unnecessary costs. Consider negotiating with suppliers for better terms, as there’s no point in paying more than you need to. Always be on the lookout for more cost-effective options to keep your spending low.

• Build a Cash Reserve – It’s a good idea to have a reserve fund covering at least three to six months of operating expenses, which you can dip into if you need to. This will help to protect your business from unexpected financial setbacks.

• Streamline Your Invoicing – It’s important to invoice customers as soon as you can, to give them as much time as possible to pay before your cash flow is impacted. Follow up with overdue payments consistently to keep cash flowing and to reduce delays in receiving payments.

Sign up to our newsletter to get the latest from Business Advice.