Cash Flow Management

There's an old decree about the business that "cash is king" and, if that's so, then cash flow is the blood that keeps the heart of the business pumping. Whether a person’s business is growing or struggling, managing cash flow effectively is absolutely essential, and for many, it's the key to business survival. A positive cash flow - meaning that the person has more cash coming into his business than going out of it - is essential for his bottom line. Without it, one won’t be able to do the essentials like pay employees, buy inventory, or cover operating expenses.

Cash flow is one of the most crucial ingredients of success for a small or midsize businesses. Without cash, profits are meaningless. Many a profitable businesses on paper have ended up in bankruptcy because the amount of cash coming in doesn't compare with the amount of cash going out. Firms that don't exercise good cash management may not be able to make the investments needed to compete, or they may have to pay more to borrow money to function. This is the reason why one must be well aware of cash flow management.

• What exactly is Cash Flow management?

• The process of monitoring, analyzing, and optimizing the net amount of cash receipts minus cash expenses is known as cash flow management.
• Cash flow management isn’t as mysterious as it sounds; it’s simply the act of balancing business income against business expenses.
• The general goal is to ensure a positive cash flow at all times while making the most strategic use possible of your cash assets.

• POSITIVE CASH FLOW- This occurs when the cash entering into the business from sales, accounts receivable, etc. exceeds the amount of the cash leaving your businesses through accounts payable, monthly expenses, employee salaries, etc.

• NEGATIVE CASH FLOW- It is a situation in which a company is spending more money than it is receiving. While this is common in many companies, especially in the first year or two of operation, it is obviously unsustainable in the long term. A company with a negative cash flow often has to resort to loans or equity financing in order to keep its doors open.

• Why is Cash Flow necessary?

• Keeping up with debt- When an entrepreneur borrows money to buy buildings, equipment and inventory, he/she essentially use future cash flow to make his purchases. Inherently, he/she needs positive future cash flow to pay for his/her debt commitments. Companies commonly have long-term loans and short-term credit accounts with vendors. Each loan requires monthly payments. The obligation to make these payments on an ongoing basis puts hold on his/her free cash flow, which is money available to invest in growing his/her business.

• Growth- Along with debt management, strong cash flow provides the comfort and capabilities a business needs to invest in growth. Buying/Renting a new location, investing in research and development, improving technology, providing more training and purchasing more forte and inventory are among the ways your business can grow and improve with strong positive cash flow. Getting to a position of excess cash flow helps the company operate in a strategic, proactive way, rather than a reactive, defensive way.

• Flexibility- Cash flow also gives business a greater flexibility in responding to emerging conundrums or making critical decisions. Confidence in cash flow makes it easier to make critical purchases in the near term rather than waiting. It also allows the entrepreneur to disperse cash in the form of dividends to shareholders or owners. This strengthens the bond between the company and its owners. Strong cash flow also makes business more appealing to a lender if he/she desires to take on new debt at some point.

Small business owners usually learn one principle early in the life - “Cash is king”. Building and keeping an adequate stockpile of cash provides maximum opportunity and flexibility to any business while enabling its owners to sleep soundly at night.

Without cash, profits are meaningless. Many of the profitable businesses on paper have desisted up in bankruptcy because of the incoming cash becoming incomparable with the amount of cash going out. Firms that don’t exercise good cash management may not be able to make the investments needed to compete, or they may have to pay more to borrow money to function. This is what makes Cash Flow Management so important.

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