Cash flow management

Cash is the lifeblood of a business. Of course, the bottom line is important, but poor cash flow management can drive even a profitable company out of business, especially if the economy is struggling.

The risk is especially great for new and expanding businesses. For example, if billing is delayed at the same time as stock is accumulated to fill increased orders, you can find yourself short of the cash needed to pay suppliers and employees.

Cash flow projections

A properly prepared cash flow projection can help a business foresee and prepare for potential shortages and surpluses. Cash flow management can also help you:

  • Maintain adequate cash reserves to pay bills, expand the business and make capital improvements
  • Reduce interest costs through managed borrowing
  • Increase interest income by transferring funds into higher-interest accounts
  • Receive discounts through bulk purchasing
  • Better manage your relationship with the bank and other lenders

Businesses that prepare cash flow projections usually learn something about their systems, and the process even has some positive side-effects. For example, you might discover that you need to pay more attention to certain customers, or that you can time payments to suppliers more beneficially.

Getting started

A simple system can be set up by creating a spreadsheet to track cash flowing in and out. A more sophisticated analysis might include monthly cash projections for the next 12 to 18 months.

First, forecast your operations on a monthly basis for the period involved. You can project the cash coming in based on sales and the collection process. Material purchases are based on the amount needed for sales, adjusted according to variations in your stock levels as a result of turnover. Finally, payments to suppliers and expenses need to be taken into account, based on the payment due dates.

Once you've projected your cash flow based on this forecasted data, you can budget for capital expenditures, unusual sources of cash or other things that might affect cash flow.

A cash flow forecast can help you manage debt more effectively, maximise your return on excess cash and ensure that funds are available when they're most needed.

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