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In order to keep your business running, you have to have cash available. Effective cash flow management protects the livelihood of your organization and ideally, ensures you have enough cash to grow.
Let’s explore what cash flow management in business looks like in practice.
What is Cash Flow Management?
Cash flow management is the tracking of money coming in and going out of a business. Proper cash flow management makes it possible to more accurately forecast cash flow needs to cover expenses.
Cash flow management is the continuous and daily process of monitoring, tracking, and analyzing the net amount of cash receipts after expenses. By staying abreast of this difference, businesses can ensure that they have enough money to cover what is owed, as well as to be able to invest in its own growth.
Why is Cash Flow Management Important?
Cash flow management strategies help to:
- Build investor trust: Investors look to allocate funds in profitable businesses, which requires long-term free cash flow and positive cash flows.
- Allocate funds: Adequate planning is required to balance liquidity and profitability, as well as to make sure that no funds are underutilized.
- Remain prepared: Unfortunately, there may be unplanned times that call for extra cash on hand. Positive cash flows help businesses be prepared for unexpected outflows.
- Stay in business: The more time a business spends without positive cash flow, the riskier it is to remain in business.
- Capitalize on opportunity: If cash is available, businesses have more freedom to jump at opportunities when they present themselves.
What are the Main Cash Flow Categories?
Cash can enter organizations in a few different ways, including:
1. Cash Flows from Investing (CFI)
This is a measure of how much cash has been generated from investments in a given period of time.
2. Cash Flows from Financing (CFF)
Financing cash flow is the net cash impact caused by raising capital. Raising capital can be in the form of equity/debt issuances, cash repayments, or the net of cash used for share buybacks.
3. Cash Flows from Operations (CFO)
Cash flows from operations refers to money that flows into a business from its normal operations, be it services or the sale of products. For a business to survive long-term, there must be more operating cash inflows than outflows - meaning that the business is making more delivering its value than it is spending.
What are Cash Flow Strategies when Money is Low?
If money is low, businesses can address it in two ways, by focusing on managing inflows or by managing outflows. Here are some tactics:
Inflows
- Streamline accounts receivables: Make inflows more predictable and steady by sending invoices faster and following up on overdue payments. With finance automation software, you can ensure this is done without having to manually take care of it.
- Borrowing: If enough money isn’t flowing into the business or isn’t being paid quickly enough, borrowing is an option. But, it comes at a cost.
- Boost inflows: It may help to adjust pricing to make sure margins are sustainable and to increase inflows.
Outflows
- Manage Expenses: Align expenditures according to inflows by delaying or requesting lump sum payments to suppliers as opposed to lump sum payments.
- Cut Costs: Cut back on spending or find ways to cut costs to lower outflows.
What is the Relationship between AP and Cash Flow Management?
Accounts payable represents money that a business owes to its vendors, meaning that it will be a cash outflow.
As part of good cash flow management, a company needs to be aware of its accounts payable and make arrangements to make payments due at a time when cash is available. If there’s a cash flow shortage and the company has to delay payments, it could affect their credit ratings and supplier relationships.
Alternatively, if the business pays accounts payable too quickly, then they could run out of cash, so accounts payable management is inherently linked to cash flow management.
What are the Benefits of Automation on Cash Flow Management?
Businesses are leveraging finance automation software to alleviate the burden of tedious and manual labor associated with cash flow management (and other key finance functions).
By utilizing cash flow management software, there are plenty of benefits to be gained, including:
1. Greater Efficiency
Automation streamlines key processes and makes them run smoother and faster. Important steps involved in cash flow management, like invoice generation, payment processing, and reconciliation are all workflows that can be run by finance automation software.
2. Enhanced Reliability
Human error can be costly, materially and in opportunity costs. With automation, businesses can reduce the risk of manual mistakes in data entry and/or calculations. In turn, they can gain the advantage of having more accurate cash flow predictions.
3. Cost Savings
Manual data entry, reconciliation, and calculations take a lot of time, which equals money. With automation and enhanced speed, companies can cut expenditures.
4. Improved Decision-Making
Automation enhances the ability to forecast more accurately so that business leaders can make better decisions about how to invest, finance, and spend money.
5. Stronger Risk Management
Automation systems make auditing easier and more trustworthy, thereby adhering to compliance. Additionally, finance automation can better detect fraud early on.
What are Examples of Cash Flow Management?
Cash flow management requires oversight and attention to detail. Let’s take a look at a cash flow management example:
Short on Cash
Sally the children’s clothing store owner is experiencing a slump in sales as flu season is happening and less parents are out shopping. Despite Sally having inventory and receivables, she isn’t selling enough.
To manage cash flow, she reaches out to her supplies to negotiate the terms of accounts payables to 60 days instead of 30 days. She also is gearing up an online shop to diversify the means by which her clients can shop.
The use of accounting and finance automation software is also helpful because it can offer insights into trends and patterns. This way, Sally can better predict how to manage inventory moving forward to adjust based on demand with stronger forecasting capabilities.
What are Challenges of Cash Flow Management?
Wondering what can cause hurdles when it comes to cash flow management?
These following represent some common challenges:
1. Cyclical Industries
Some businesses exist in cyclical industries that rely on outside factors, such as real estate and changing market conditions.
2. Growth
Very rapid business expansion can lead to cash flow challenges because of higher labor costs and greater costs for inventory and/or equipment.
3. Extending Credit
Most invoices are due based on 30, 60 or 90 day terms. However, some businesses may choose to extend credit, which leads to further delays of cash inflows.
4. Projections
No one knows the future with certainty, so projects always fall a bit short of reality.
5. Missing Accounts Receivables Software
Manually managing accounts receivables causes delays and can result in errors. Ultimately, this will affect cash flow. Instead, businesses can forgo this concern by investing in finance automation software that will streamline accounts receivables processes.
What are Cash Flow Management Best Practices?
To optimize your cash flow management procedures, keep in mind the following best practices:
- Optimize Invoicing: Send invoices as soon as you can once you provide the goods or services. This may help to get paid more quickly.
- Utilize Automation: Use finance automation software to execute workflows like invoicing, payments processing, and reconciliations. The right automation software will also be able to help you to better forecast and plan, in turn, protecting your cash flow.
- Negotiate Terms: Work with suppliers to negotiate payment terms so that you have cash on hand. For customers, implement flexible payment plans to collect on money that is owed.
- Cash Reserve: Do your best to have a buffer of cash to cover unexpected expenses or to be able to capitalize on opportunities.
- Leverage Data: Make use of historical data for analysis to identify trends, predict patterns, and understand recurring expenses.
- Identify Risks: Be aware of risks like late payments and put in place safeguards to mitigate such outcomes.
- Monitor Cash Flow: Importantly, regularly compare your cash flow projections with actual cash flow to adjust strategies to be more accurate.
How SolveXia Helps with Cash Flow Management?
SolveXia is finance automation software that can optimize your cash flow management by handling accounts payable automation, reconciliation, analysis, and more. By using SolveXia, you can save time and complete process 100x faster, with 98% fewer errors.
Your finance team gains access to real-time analytics and insights, enabling better decision making while removing the need for tedious, error-prone, and manual labor.
Request a demo with us to see how our finance automation software can modernize your cash flow management.
Closing Words
Cash flow management is a must to protect your business’ longevity by ensuring you have cash available. With proper recordkeeping, oversight, and continuous control, you can maximize your cash flow management.
Finance automation software makes internal control, oversight, and cash flow management efficient and less stressful – learn more today!
