Cash Flow Management Guide

1. Intro to Cash Flow Management

Next Read: What is Business Cash Flow and How to Manage It

Business Finance

Intro to Cash Flow Management

May 23, 2023 • 10 min read
consistent cash flow small business
Table of Contents

      Effective cash flow management is crucial for the financial health and stability of any entity, whether it’s a small business, a large corporation, or an individual. It helps to ensure that there is sufficient cash on hand to cover operational expenses, invest in growth opportunities, and handle unforeseen circumstances.

      What is cash flow management?

      Cash flow management refers to the process of monitoring, analyzing, and optimizing the movement of cash into and out of a business’ or individual’s finances. It involves managing the timing and amount of cash inflows and outflows to ensure that there is enough cash available to meet financial obligations, such as paying bills, salaries, and other expenses.

      Key aspects of cash flow management include:

      Cash flow projection.

      This involves estimating the timing and amount of cash inflows and outflows over a specific period, usually a month or a year. It helps to anticipate future cash needs and identify potential shortfalls.

      Receivables and payables management.

      Monitoring and managing accounts receivable (money owed to the business by customers) and accounts payable (money owed by the business to suppliers and creditors) is crucial. Efficiently collecting receivables and extending payables when appropriate can help improve cash flow.

      Expense control

      Analyzing and controlling expenses is vital to maintaining healthy cash flow. By identifying unnecessary or excessive costs, businesses can reduce cash outflows and preserve more cash.

      Cash reserves

      Building and maintaining an adequate cash reserve is important to handle unexpected events or emergencies. Cash reserves act as a buffer to cover temporary shortfalls and ensure smooth operations.

      Financing and investment decisions.

      Evaluating financing options and investment opportunities is another aspect of cash flow management. Businesses need to assess the impact of borrowing, interest payments, and potential returns on investment on their cash flow.

      Cash flow monitoring

      Regularly tracking and reviewing actual cash inflows and outflows against projected numbers is essential. It helps to identify any deviations or issues promptly, allowing for timely adjustments and corrective actions.

      How to better manage cash flow.

      The cash flow management guide will walk you through the components of good cash flow management. An overview of each topic is provided below.

      Chapter 1: Business Cash Flow 

      Dive into the elements of what cash flow is.

      Business cash flow is how funds move through your business. It includes looking at your income and expenses, but it also takes into account how money is reinvested in your business. For example, a cash flow statement would consider the purchase of fixed assets or the payoff of liabilities. In the end, you will determine how much free cash flow is left after paying your expenses and reinvesting in the company.

      Chapter 2: Why is Cash Flow Important?

      Learn why cash flow is critical to the success of your business.

      There are several reasons that a business’s cash flow is essential. Cash flow analysis allows you to determine whether you have enough funds on hand to pay your business expenses, monitor whether your business has the capital on hand to make investments, and whether you will be able to cover unexpected expenses. 

      Chapter 3: Free Cash Flow Formula 

      Learn how to calculate free cash flow and how to use this information.

      Free cash flow is the amount of funds left over after your business has paid all of its bills and reinvested funds in the business. Free cash flow is available to be paid out to the business owners or used for further reinvestment. This chapter outlines the formulas for calculating operating cash flow and determining your capital expenditure figure.

      Chapter 4: Cash Flow Forecast 

      Learn how to create a cash flow forecast.

      A cash flow forecast is a projection of the inflows and outflows you project for your business. The time period for the cash flow may consist of several months or several years, depending on the needs of your business. A cash flow forecast can help you weather seasonal slumps in revenue or plan for large upcoming investments. 

      Chapter 5: Cash Flow Projection Template 

      Start building out your forecast with this simple template.

      A cash flow projection template is a tool that can be used to forecast your business’ projected cash flow. Note that every business has unique revenue projections and will have various expenses. A template is a good starting point for your cash flow projection, but any template will need to be adjusted to account for your business’ operations. 

      Chapter 6: Increase Cash Flow 

      Learn techniques for improving your business’ cash flow.

      Increasing your business’ cash flow will create more opportunities for you to reinvest in your business and it will free up cash available to the owners. There are several techniques for increasing your cash flow. You can use cash flow management software to identify areas of possible improvements or work with your vendors to reduce your expenses and increase your sales. You may also be able to realize additional improvements by placing inventory orders in bulk, offering your customers discounts for prompt payments, or reviewing your products to determine which ones have the best sales. 

      Chapter 7: Cash Flow Problem 

      Learn common sources of cash flow problems and how to solve them.

      At some point, most businesses run into cash flow problems. While these problems may be temporary, you should address them quickly to ensure they don’t become longer-term problems. There are several common problems faced by businesses, the most common of which are a lack of understanding of your cash flow, falling behind on your finances, late payments, and payment terms that are no longer working for your business. 

      Chapter 8: Negative Cash Flow 

      Learn the causes of negative cash flow and how to address them.

      Negative cash flow can cause problems for businesses by making it hard to pay bills, employees, and suppliers. It can also limit the ability to invest in growth opportunities. To avoid these problems, it’s important to manage your cash flow carefully. 

      Chapter 9: Budgeting Vs. Forecasting

      Learn the differences between budgeting and forecasting.

      Budgeting and forecasting are two essential components of financial planning, but they serve different purposes. Budgeting involves setting financial targets and allocating resources based on a predetermined plan. On the other hand, forecasting involves projecting future financial performance based on historical data, market trends, and assumptions.

      Chapter 10: Budget For a Business

      Learn how to create a budget for your business.

      Creating a business budget is important for planning and allocating income and owner distributions. The budget should be broken down monthly for easier monitoring of financial performance. Evaluate income and expenses and consider any upcoming changes when creating the budget.

      Chapter 11: Business Budget Template 

      Grab a free template for building out your business budget.

      Once you’ve determined that your business needs a budget, you can start with a business budget template to create your company’s budget. A template will outline the basic information you need to gather and project for your business. Much like the cash flow template, you’ll need to update any predefined template to suit your business. This will include adding any additional revenue sources or expense categories unique to your business.

      Overall, effective cash flow management enables businesses to maintain liquidity, make informed financial decisions, and ensure long-term financial stability. By actively managing cash flow, small business owners can improve their financial position, minimize the risk of insolvency, and seize growth opportunities.

      Manage your finances with confidence.

      View loan offers, receive payments, and track your cash flow with the Lendio mobile app.

      About the author
      Casey Long

      Casey Long is a CPA with over 15 years of experience. She has spent her career explaining complex financial concepts to various audiences. She started as a bookkeeper and worked her way up, so she understands all aspects of accounting processes.

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