5 Signs your business needs better cash flow management

Cash flow management is an essential skill for anyone running a business, whether you are just starting or have years of experience. Poor cash flow management can lead to serious problems, including bankruptcy.

This article will explain what cash flow management is, why it matters, and how to manage it effectively. We will also share practical strategies and real-world examples to help you improve your cash flow.

Understanding cash flow is vital for making informed decisions and ensuring the long-term success of your business. Let’s explore this important topic further.

What is cash flow management?

Cash flow management is the process of tracking and improving the money coming in and going out of a business. Every company has cash flow. Managing this cash is crucial for growing your startup successfully.

Before understanding cash flow management, it’s important to know what cash flow means. Simply put, cash flow is the movement of money in and out of a business over time.

Cash flow is often examined using a cash flow statement. This financial document provides insights into a company’s activities and overall financial health.

Here is a sample cash flow statement:

XYZ Accounting Firm

Statement of Cash Flows

For the Year Ended December 31, 2023

Cash Flow from Operating Activities:

Cash received from clients

Cash paid for salaries

Cash paid for office expenses

Cash paid for utilities

Net Cash Provided by Operating Activities

Cash Flow from Investing Activities:

Cash paid for office equipment

Cash received from sale of old equipment

Net Cash Used in Investing Activities

Cash Flow from Financing Activities:

Cash received from bank loan

Cash paid for loan repayment

Net Cash Provided by Financing Activities

|Net Increase in Cash for the Year| $95,000|
| Cash at the Beginning of Period | $25,000 |

|Cash at End of Period| $120,000|

These financial reports, along with the balance sheet and income statement, are important for managing a company’s finances.

Cash flow management begins with understanding your financial situation. Use this information to make good business decisions. It involves keeping enough cash in hand to cover short-term needs like salaries, operational costs, and product expenses.

Why is cash flow management important?

Cash flow management is important because it helps a business have enough cash to pay its short-term bills. It ensures that a business can keep running smoothly and meet its daily expenses. Good cash flow management also helps businesses handle tough economic times and uncertain market situations.

What is a cash flow statement?

The first step in managing cash flow is understanding your current cash flow. If you don’t know your numbers, you risk failure. Keeping track of your finances gives you a clear view of your company’s status and future. A cash flow statement summarizes the cash that comes in and goes out of a company. It helps you see your business’s cash inflows and outflows monthly, bi-monthly, and yearly. There are three types of cash flow to understand:

1. Operating cash flow

Operating cash flow is the cash generated by a company’s regular operations. This includes net income, non-cash expenses, changes in working capital, and cash from operating activities.

2. Investing cash flow

Investing cash flow covers all purchases of capital assets and investments in other businesses. It relates to long-term assets and securities. This includes capital expenditures, proceeds from sales and investments, and loans to others or repayments.

3. Financing cash flow

Financing cash flow shows transactions related to a company’s financing activities. This includes dealings with investors and creditors to raise or repay capital.

Additionally, there is a reporting period. This refers to the specific time frame for which the cash flow statement is presented.

Why is a cash flow statement important?

Understanding your business’s liquidity potential

Liquidity shows how much cash you have on hand. This cash helps you pay your operating expenses. Your liquidity affects how much you can spend since it reflects your available cash reserves.

Analyse performance trends

The cash flow statement lets you see changes in your business activities. You can spot trends over time. Steady positive cash flow suggests a healthy business. A negative trend may signal financial problems ahead.

Forecasting and planning

By looking at past cash flow data, you can predict future cash flow. This is important for financial planning and budgeting. It helps you create strategies to improve cash flow in the future.

How to start improving your cash flow management

There are many ways a business can manage its cash flow better. Here are our top five picks:

1. Improving invoicing and payment collections

Make sure your clients pay on time. Follow up with customers who are late on payments. Ensure that your invoices are accurate and sent out quickly. This will help you manage your cash flow more effectively.

2. Negotiating favourable payment terms

Talk to your suppliers and vendors about better payment terms. If you can delay payments, you will have more cash available for other needs. This can improve your short-term cash flow.

3. Improve inventory management

Better inventory management can help you avoid overstocking. This will lower your holding costs. Consider discounting slow-moving items to sell them and free up space. With less overstock, you can focus on selling higher-margin products, which increases profits and cash flow.

4. Utilising modern cash flow management tools

Most accounting software includes cash flow management tools. These tools often have features for forecasting, tracking expenses, and organizing financial data. Some options include:

• Quickbooks
• Xero
• Float
• SAP
• Pulse
• Wave

5. Diversifying income streams

Your income can depend on the market and economy. Think about diversifying your services to rely less on a few clients. Explore new markets to boost your revenue streams.

Example of a successful cash flow management

A simple rule for managing cash flow is to keep expenses low and income high. Here are some examples of effective cash flow management.

Apple

In the late 1990s, Apple was close to bankruptcy. Today, it is often cited as a success story in cash flow management, achieving $110 billion in operational cash flow by the end of 2023, according to Forbes.

Back then, Apple faced negative cash flow. Just weeks before a potential shutdown, Steve Jobs returned as CEO. At that time, Apple’s stock was at a 12-year low.What did Jobs do to improve cash flow? First, he canceled 70% of products that were not profitable or valuable to customers.

Next, he streamlined the product line to only four items: two desktop computers and two portable devices. He focused on Apple’s core strengths. Within three years of Jobs’ return, Apple sold 1,350,000 iMacs in one quarter. This equates to one iMac sold every six seconds. This case shows that successful cash flow management focuses on acquiring clients to boost profitability.

Negative cash flow management: Case study

An example of negative cash flow is Lehman Brothers, which contributed to the global financial crisis in 2008. This happened due to poor cash flow management.

Lehman Brothers made bad investments in real estate and subprime mortgages. When the US housing market declined, these investments failed. They had few liquid assets and high debt compared to their equity, which left them without cash to recover. This case shows that a lack of regulations in the company and financial system led to the bank’s collapse.

Key business decisions that maintain and increase cash flow

Cash flow problems are common for many founders in the first 3-5 years of a company. Most businesses do not make a profit in the first three years. Poor cash flow management can lead to closing down.

Remember, cash flow is not the same as profit. Cash flow appears on the cash flow statement, while profit is on the P&L statement at the top of the income statement. If you face cash flow issues, try to increase revenue or reduce expenses. Ideally, do both.

Marketing and sales drive revenue. Focusing on selling more products helps keep cash flow positive. Also, keep prices competitive and maintain low operational costs without sacrificing product quality for a sustainable business.

Robert Kiyosaki said, “It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” This shows why understanding financial statements is important for business success.

You can have positive cash flow but low profit or high profit but low cash. Knowing this difference helps you make better decisions about what to improve in your company. Here are three ways to manage your cash flow better:

Keeping your financials organised

Seeing all your finances in one place gives you a clear view of your income and expenses. This helps you budget and plan effectively, allowing for smart and accurate fund allocation.

Strategic focus on business development and sales

Increasing sales volume is a great way to boost revenue. By gaining new customers, you can improve your company’s cash flow.

Work with a qualified CFO

As a business owner, it’s important to understand basic cash flow management. Consider hiring an accountant or CFO who specializes in this area. A CFO can show you where your money is going and suggest ways to improve your business’s financial health.

Optimising operational costs, building systems, and processes

Creating systems that reduce internal spending helps in several ways. First, it increases profit margins by cutting unnecessary costs. A leaner cost structure also allows you to adapt better to market changes, like a recession.