Cash flow management involves analysing how much money is coming into a business and comparing it against the firm’s outgoings, such as bills and staff wages. Its purpose is to predict the amount of available funds a business will have for the future, as well as understanding how much the company needs to make to cover its debts.
Available cash is the lifeblood of any organisation. Without it, a firm won’t be able to pay bills such as taxes and utilities when they fall due, settle invoices from suppliers, or even cover its employees’ salaries. Cash flow can be described as positive or negative. If you have more money coming into your company than going out, then you have a positive cash flow. Should more funds be leaving your business than coming in, your cash flow is negative.
Cash flow management is not just about analysing how much is coming in and out of a firm, but also working out when the business gets most of its money and whether it will be there in time to cover large expenses. For example, it’s all well and good to have £35,000 a month in income and have outgoings worth £25,000, but what if the vast majority of this doesn’t come in until the end of the month and you have a tax bill due midway through? You’re clearly going to struggle.
In this scenario, a company is going to want to see if there is any way it can get its hands on this money sooner. It’s not uncommon for businesses to have a large chunk of assets tied up elsewhere, such as in stock or unpaid invoices from third party firms. Effective cash flow management can help it see whether it needs to buy less inventory or set out new payment terms to ensure that more cash is readily available.
Another use of cash flow management is to work out how much spare money the business has. If it has more than enough funds to cover its expenses as they fall due, the excess can be used to grow its operations further — such as hiring more staff, buying new equipment, or moving into bigger premises. Timing is everything in business, so you’ll want to make sure that you’re expanding safely and not putting yourself at risk. Looking after your cash flow lets you make informed decisions.