The Ultimate Guide to Understanding about Cash Flow Management
They say cash is the lifeblood of every business. This is true because a business requires proper cash flow to achieve the set goals. Cash is also necessary to the growth and profitability of the enterprise. Hence, entrepreneurs and companies that do not manage their cash flow properly are not able to invest enough to compete successfully, or they may have to borrow money that usually comes with interest.
Definition of Cash Flow Management
Cash Flow management is the process of managing income and expenses at an individual or business level and ensuring that the funds are available for investment and saving. On the other hand, cash flow management is the process of analyzing, monitoring, and optimizing the disposable amount of money received after subtracting cash expenses. Therefore, net cash flow is critical when considering the health of every business.
Maintaining Cash Flow Forecast
Fulton CPAs said, “One way of managing cash flow is by planning and maintaining cash flow forecast.” For an accurate future outlook, update your cash flow forecast weekly. Setting goals for the credit controllers is also a good way to ensure that cash flow receives the attention it requires to generate the right level of satisfaction.
Establish Proper Terms of Payment
Ensure that you have clear payment terms from the start. This will enable you know when you will receive the payments. For instance, if you own a construction company working for the government, the law stipulates that such payments must be paid within 30 days from the time you began the project. For proper cash flow, it is important to establish similar terms with your other clients whatever the type of business.
Cash Flow versus Profits
Cash flow is not similar to an income statement; hence, profit and loss statements do not provide enough information about cash flow. Other factors will contribute to cash flow including inventory, capital expenditure, debt service, and account receipts. Good cash flow management, therefore, needs a proper focus on each of these determiners, including profit and loss. Additionally, invoicing a client for services or products you sold to them brings revenue while collecting money on that invoice is what generates cash.
The Process of Cash Flow Management
Considering the fact that there are several proven ways for managing and improving cash flow it would be important to understand how the whole process works. For a start, to speed up the process of receiving cash, use post office boxes run by banks to allow the customers in various locations to mail payments since the banks will process the checks faster. Alternatively, ask customers to use any cheaper cash transfer means that are convenient to them. You can also give discounts to clients who pay their bills on time.
Healthy cash flow requires you to increase sales; therefore, attracting new customers is essential for your business to grow. However, you should be careful when increasing sales to avoid raising the accounts receipts instead of the real cash. The best way to prevent the credits is by carrying out adequate research in advance to know the risks involved.
The success and growth of any business depends on the flow of its cash. Thus, controlling the volume of business consistency is an important way of managing cash flow. You should, therefore, track down your cash flow outcome periodically to determine whether your company is maintaining a healthy cash flow. You should also remember that proper use of money in the business is a primary necessity for additions to and maintenance of physical assets to sustain its competitiveness and efficient operation. With this in place, you can rest assured that cash flow in your business will be as efficient as it gets.
