No matter you have a great business model but if you do not take your startup’s cash flow seriously then you are ready to set yourself up for impending danger. You may have a lot of investors interested in supporting your business resulting in a lot of profit but if you are not able to successfully manage your company’s cash flow then you are bound to fail. Good cash flow management will help you take your business to great heights.
What is Cash Flow Management?
The main task of cash flow management is to track down how much capital is coming into and going out of your business. It helps you to predict how much money you will have soon. One can say that cash flow management is the process of drafting a company’s schedule for paying bills and estimating when income will be received. It also helps a company to avoid damaging their relationship with creditors by not paying the amount on time and being bankrupt. It tracks the changes in the cash flow, helps you to spot trends and tackle any problem with your cash flow. The practice of Cash Flow Management is to make sure that your business has enough money to keep running.
How to start and use a Cash Flow?
The most important aspect of every business is to manage the amount of money that comes in and goes out. Cash Flow gives you an idea as to how money flows in and out of the business to help you to spot trends and manage them accordingly and also helps you to have a picture where you stand at any given time.
The four steps below will help you to create your cash flow in an easy go.
1 – Start with the total amount of funds your business has in its bank account.
2 – Calculate the amount of cash coming in from all the sources.
3 – Determine as to where the cash is used.
4 – Lastly, you need to subtract the uses of cash from your cash balance.
How to use it?
The biggest advantage of the cash flow is that it provides information as to how one should handle his/ her businesses. When you notice the figures in black and white you will realize the time when you either have to cut the amount of money you are spending or increase the money coming in – whether it is by booking more business, getting paid faster or getting a loan.
Types of Cash Flow Activities:-
- Operating activities: Cash activities related to net earnings.
- Investing activities: Cash activities related to noncurrent financial assets.
- long – term investment.
- property, equipment, and plant.
- the principal amount of loans made to the other establishment.
3.Financing activities: Cash activities related to owner’s equity and non – current liabilities.
They include 3 items:-
- Principal amount of long- term debts.
- Stock sales and repurchases.
- Dividend payments.
Types of Cash Management :
There are four types of cash management:-
- Cash flow from Operating Activities:- Found on the cash flow statement of an entity and does not include cash flow from investing.
- Free Cash Flow to the Firm:- Used for valuation and financial modeling.
- Free Cash Flow to Equity:- Represents the amount of available cash after the currency is reinvested.
- Net Change in Cash:- Refers to the total amount of cash flow moving from a particular accounting period to another.
Objectives of cash flow management :
There are five main objectives :
- To meet working currency requirements.
- To ensure sufficient liquidity.
- Not to use capital funds for short – term requirements which will result in capital erosion.
- To fulfill short – term needs forming part of administrative activities for running a business.
- There is an indirect objective which ensures stakeholders wealth maximization which serves as the primary organ for all the objective
How to manage Cash Flow?
Monitoring the cash flows is the most important thing a person needs to do while running a business. One can manage his / her cash flow by following the pointers below:-
- Monitor your cash flow regularly with the help of online accounting software like QuickBooks Online makes it easier to go through the accounts, generate reports, etc.
- One must get a business line of credit as it is a good insurance policy against cash flow problems.
- If you have equipment that is no longer useful you can sell it to generate quick cash.
- You must stay on top of invoicing.
- One can get the payments faster using a mobile payment solution.
- Concentrate on recurring monthly, quarterly or annual expenses.
- Always stay on the top of your cash flow by getting business credit cards to cushion your cash flow.
- Offer deals for speedy payments.
- Lease equipment such as vehicles, computers and other business equipment instead of buying.
- On large orders or long – term contracts the business owner must ask for partial payments or deposits.
Benefits of Cash Flow management :
Cash Flow management is the most important and necessary unit for every business. Businesses can be topline and have steady bottom line profits but without cash nothing of this is possible. When cash flow management is done accordingly it indicates oncoming issues and ongoing problems and drives a solution to tackle such sort of problems. You need to plan something if your clients consistently delay your payment. If your business has a healthy cash flow it enables you to pay salaries on time and have enough funds for growth and expansion of the business. Every company must have an adequate cash flow from its business to survive and can cover its expenses, repay investors and expand the business.
- Your mind remains peaceful as all your cash flows are known and properly funded.
- One can take better decisions as it gives you an understanding of cash and liquidity.
- Improves relationship as well as communication.
- It helps you to predict and plan for large cash flows.
- With proper cash flow management, your business can achieve the desired goal in a managed way.
- Ensures business success and longevity.
- Guides with bank lending requirements.
- Maximum cash flow, profit, and business value improves your business process.
Cash Flow Management Tools :
It is very easy to look at how much money is there in the bank than to manage cash flow for your business. But in this 21st century, several tools will help you to manage your cash flow more effectively.
Below there are cash flow management tools that will help you to handle your capital serenely:
- Float: “Float” helps you to give an idea as to where your business is headed and lets you plan more effectively. It integrates with many accounting platforms and gathers information automatically which gives you knowledge that you do not have to spend time inputting data manually.
- Scoro: Scoro is a robust tool. It includes a cash flow management tool in its service but is a business management tool incorporating budgeting, customer relationship management and also project management. It is the best cash flow management tool as it is highly rated by users who are pleased with the platform’s reliability.
- PlanGuru: It relates to accounting platforms to provide users with both forecasting and current cash flow data. Small businesses can rely on this PlanGuru as its functionality is limited when compared to more robust tools in the market. It also has an analytic tool to help entrepreneurs drill down and make them understand about complex financial data.
- Pulse: Pulse helps to monitor the capital of your business. Businesses have the power to use cash flow management to grow and evolve with the help of this tool. Pulse also connects with QuickBooks.
- QuickBooks: It offers a simpler way of cash flow forecasting though it is less comprehensive than some other platforms. It is one of the best tools for small companies.
- Google Docs: Google Docs helps individuals and businesses with cash flow management as well as offers several different user-generated templates. They provide a simple introduction to tracking, monitoring and forecasting cash flows as these are free tools that are not that sophisticated as the other paid platforms.
- Cash Analytics: Cash Analytics is the best tool for cash flow management for big companies. Insights are provided by Cash Analytics to the finance teams of larger businesses.
Being the owner of a business company is basically about making all sorts of decisions regarding your business. A wrong decision can ruin everything you have built up toiling day and night. Making a good decision determines whether your company fails or prospers in the long run. For making good decisions you need to have a lot of knowledge as well as information, particularly about financial situations. Cash Flow Management is thus an important organ of any business.
From the above piece of article, a business owner can understand how important it is for him to have track of their funds i.e. cash flow management. It is thereby a necessary element to have an account of all the payments and bills so that one does not end up being bankrupt. Cash Flow Management paves a long way for you to establish a successful business. We have highlighted all the necessary details regarding this topic and hope that you will be able to manage the cash flow of your business shortly.