Cash flow Management

Jan 25, 2018 | Cash Flow Finance

Cash flow management is essential to small business finance requirements to provide continuity of trading and that it has sufficient funds to meet daily expenses and any debt payments due. The management of working capital involves managing these 4 aspects of the company’s operations.

Cash Flow Management Basics

For small business operators cash flow management is one of the most important aspects of running a healthy businesses. Financial mastery is often an area that is overlooked or misunderstood. Proper cash flow management accomplishes a number of goals, including providing continuity of trading. The companies must ensure there is sufficient funds to cover  daily operating expenses and debt payments.

Why is Cash Flow Management Important?

A significant lack of working capital is one of the most common reasons that companies fail. Cash is king, and without it, a business just can’t operate. Therefore, the problem arises when a company can’t pay its employees or creditors even though it’s bringing in sales and turning a profit. Once that happens, the pattern often continues in a vicious cycle, with the business becoming more and more cash-poor. Besides not allowing debt to grow, it chokes off the businesses ability for reinvestment thereby stunting company growth.

The Four Key Areas of Cash Flow Management

Companies looking to keep their cash flow healthy need to avoid some common pitfalls. The successful management of working capital involves managing four key aspects of a company’s operations:

  • Cash
  • Accounts payable (money owed to suppliers)
  • Accounts receivable (debts owed to the company)
  • Inventory (stock, work-in-progress, and equipment)

Because each of these areas requires careful attention and to avoid failure, the company must correctly monitor and manage these key areas. Any one of them could result in cracks that can grow into serious cash flow problems.

Cash Flow Management Steps

Source: Moula Infographic


Cash includes all of the money that a company has, including short-term investments that can be quickly converted to cash when needed. It’s a mistake to think that just because a company is profitable that they have plenty of cash on hand. Profitable companies can run short on cash for several reasons, including;

  • A business spending on materials before goods are sold, incurring expenses before sales and profits come in.
  • Large capital purchases like tools, machinery, vehicles, or other commercial equipment.
  • A business with loans or taxes-owing that require immediate payment to avoid incurring penalties.
  • Customers failing to meet agreed-upon payment terms and time-frames.

Companies that fail to plan for any or all these potentialities are setting themselves up for disaster, as it’s almost a certainty that at some point one or more of these cash drains will creep up.

Accounts Payable

Accounts payable impact cash flow in an obvious way because money paid to creditors is money no longer available for other expenses. Consequently, some companies delay paying creditors and suppliers in an attempt to keep available cash balances higher for operating expenses like salaries. Unfortunately, there are some serious disadvantages to that strategy. Delaying payment to suppliers to try and avoid cash flow problems just causes the same types of cash flow problems for them. As a result, suppliers who aren’t paid on time may withhold future discounts or stop prioritizing service. Failure to pay suppliers on time also damages company reputation and jeopardizes the likelihood of other suppliers extending credit in the future.

Accounts Receivable

Slow paying customers can have a tremendously negative effect on a company’s working capital. Therefore its not uncommon for companies that go under to have a glut of unpaid accounts receivable. It’s also extremely costly and time-consuming to chase down unpaid invoices  which cases a potential drain on resources and cash flow. Accounts receivable problems are generally bad for business all around. Besides the financial consequences there is the potential negative impact on customer relationships. Therefore, the best thing a company can do is to have clearly defined payment terms and debt-collection policies in place. Because when a problem does arise, it can be dealt with quickly in a consistent and reasonable manner.

Inventory and Stock

Companies that mismanage their inventory can find themselves sitting on large amounts of expensive stock, significantly depleting their cash stores. Inventory management can be very difficult, and it’s a common source of headache for a lot of small business owners. Companies that take a proactive approach to inventory and following some common best-practices can go a long way. Therefore, understanding stock turnover and demand cycles are the keys to keeping inventory levels low. Enough to meet demand without burning up too much cash, but not so low as to risk running out. Companies should keep a close eye on raw materials, work-in-progress, and finished goods, and if the situation merits it, investment in inventory management systems can go a long way towards ensuring stock is controlled properly.

Cash Flow Management and Financing

  • Financial activities include the inflow of cash from lenders such as banks, investors, or shareholders and short-term investments sold. Outflows include capital expenditures and purchases of property, plant and equipment (PPE). Companies looking for a good short-term cash flow strategy can invest in options like shares, term deposits, corporate bonds. These investment vehicles offer an appreciation opportunity for businesses which can also be liquidated quickly and reliably when cash is needed.
  • Cash flow has a major impact on small business trying to secure finance. When applying for unsecured short-term financing, alternative lenders look at net cash flow between a company’s revenue and operating activities. Besides this, other approval criteria including credit score, industry risk, and company age are important. Companies should ensure that their cash flow management statement inspires confidence in their ability to manage cash flow and repay potential loans.

Cash Flow Analysis

One important tool companies have at their disposal is the cash flow management statement, which reflects a company’s liquidity. Because it includes the inflow and outflow of cash and excludes transactions that don’t directly affect cash receipts and payments. These cover three types of financial activities such as operating activities, investing activities, and financing activities. Therefore, the cash flow management statement is extremely valuable to senior executives and investors because of its ability to;

  • Provide information on a company’s liquidity, solvency, and ability to alter cash flow in the future.
  • Provide company information for evaluating changes in assets, liabilities, and equity.
  • Indicate the amount, timing, and probability of future incoming and outgoing cash flows.
Small business owners can call us direct on 02 9006 1327 and speak to your finance specialist.  Accrutus Capital will provide more information about cash flow management options to suit your trading model. Accrutus Capital might just be able to help boost your business with up to $600,000 instantly, with no security required.


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