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The Importance of Cash Flow Management

Posted by Traci A. Malik Posted on Apr 22 2016

Poor cash flow management is a big stumbling block for entrepreneurs and is the main reason for business failure, according to many business analysts. Therefore, it is vital to businesses to understanding the basic concepts of cash flow will help you plan for the unforeseen eventualities that nearly every business faces.

Cash is ready money in the bank or in the business. It’s commonly referred to as a liquid asset and is not inventory, accounts receivable or property. While these can potentially be converted to cash, they are not readily available sources used to pay suppliers, rent, or employees. 


Cash flow refers to the movement of cash into and out of a business. Watching the cash inflows and outflows is one of the most important management tasks for any business. The outflow of cash includes those checks you write each month to pay salaries, suppliers, and creditors. The inflow includes the cash you receive from customers, lenders, and investors.


Why is Cash Flow Management so Important?


While there are many reasons why having a good understanding of your businesses cash flow is important, these seem to top the list:


Having cash puts you in a more stable position with better buying power. While you can borrow money at times, cash affords you greater protection against loan defaults or foreclosures.


When you borrow money to buy buildings, equipment and inventory, you essentially use future cash flow to make your purchases. As a result, you need positive future cash flow to pay for your debt commitments.


Along with debt management, strong cash flow provides the comfort and capabilities a business needs to invest in growth. Cash flow also gives your business greater flexibility in responding to emerging dilemmas or making critical decisions.


Confidence in cash flow makes it easier to make critical purchases in the near term rather than waiting. It also allows you to disperse cash in the form of dividends to shareholders or owners. This strengthens the bond between the company and its owners. Strong cash flow also makes your business more appealing to a lender if you desire to take on new debt at some point. You also have the ability to offer favorable credit terms to attract new buyers if you are less desperate for cash.



What Are the Components of Cash Flow?


A Cash Flow Statement shows the sources and uses of cash and is typically divided into three components:


Operating cash flow, often referred to as working capital, is the cash flow generated from internal operations. It comes from sales of the product or service of your business, and because it is generated internally, it is under your control.


Investing cash flow is generated internally from non-operating activities. This includes investments in plant and equipment or other fixed assets, nonrecurring gains or losses, or other sources and uses of cash outside of normal operations.


Financing cash flow is the cash to and from external sources, such as lenders, investors and shareholders. A new loan, the repayment of a loan, the issuance of stock, and the payment of dividend are some of the activities that would be included in this section of the cash flow statement.


How Do I Practice Good Cash Flow Management?


Good cash management can be simple. The basics you need are:


1. Knowing when, where, and how your cash needs will occur

2. Knowing the best sources for meeting additional cash needs

3. Being prepared to meet these needs when they occur, by keeping good relationships with bankers and other creditors.


The starting point for good cash flow management is developing a cash flow projection. As a business owner, you must know how to develop both short-term cash flow projections to help manage daily, weekly and monthly cash needs. Annual and long-term cash flow projections will serve to help develop the necessary capital strategy to meet business needs. It is also beneficial to prepare and use historical cash flow statements in order to understand how money has been spent in the past.


If you have questions about cash flow management, contact Jones & Company, CPAs at 727-845-4166. We will be happy to answer any questions.