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What is Cash Flow Management: Types, Importance and Working

  • Utsav Mishra
  • Feb 28, 2022
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Hi! Let us start this one with a short story. You like reading stories, don’t you? So let’s begin. There was a brand. A brand started years ago (not in medieval times obviously). The brand was all set, going good. 


Three years passed like this, and then one day the audit report came. The audit report for the 4th year! And it showed the owners that the company is going into immense loss. No one was sure about the reason. 


Obviously, it was a really surprising moment. Eventually, the losses forced the company to get shut down completely. So “what exactly happened”?


The exact thing was that, in the last year, the finance team didn’t look at the fundings and didn’t track the expenses according to it. In this case, the company didn’t know about the exact status of its funds. Basically in financial terms, the company didn’t do proper “Cash Flow Management”.


Now we are all set for the texts that will come ahead. So, in this blog, we are going to look at “Cash flow management”.


If you own a company or are planning to own one in the near future, this is going to be important.


So, let us dive in.


What is Cash Flow Management?


The process by which an organisation maintains control over the input and outflow of funds is referred to as cash flow management. The primary purpose of cash flow management is to ensure that the inflow of funds is always greater than the outflow, resulting in a surplus for the company.


Cash flow management also has the side benefit of ensuring that surplus funds are prudently invested or kept in order to maximise the return on capital invested. 


Money, sometimes known as cash, is the lifeblood of any company. When the money stops flowing, all important operations might come to a halt.


Profit, on the other hand, is the amount of money left over after all the costs of making and providing a product or service have been deducted.


When the difference between cash coming in and cash going out of your firm is negative at the end of a period, it signifies you have less cash than you did at the beginning of that time.


Also read | 5 Types of Corporate Actions


The ultimate purpose of cash flow management is to keep the business from running out of cash. Payments to creditors must not be passed due for a business. It also can't have any long-term debtors on its records. When such situations arise, it's time for the cash flow manager to take command.


Types of Cash Flow Management


There are two types of cash flow management. They are based on the amount of exterior and interior cash flow. They are:


  1. Positive Cash Flow Management 


This occurs when the revenue flowing into your firm from sales, accounts receivable, and other sources exceed the cash flowing out through accounts payable like monthly expenses, salaries, and other sources.


  1. Negative Cash Flow Management


This occurs when the revenue flowing into your firm from sales, accounts receivable, and other sources exceed the cash flowing out through accounts payable like monthly expenses, salaries, and other sources.


Also Read | What is Cash Flow Analysis?



Importance of Cash Flow Management


Cash shortages can indicate a problem in your company. Cash is the lifeblood of a company, and running out of it prevents you from meeting your financial responsibilities. 


If you fail to satisfy your financial responsibilities, your company may be forced to close its doors. One of the reasons that 82 percent of firms fail is a cash shortfall.


Being cash-strapped is a stressful and unpleasant situation to be in. Effective cash management has numerous advantages, including less stress, assurance that you will be able to meet your financial responsibilities, and knowledge of when client payments will arrive in your bank account. Having a cash management strategy in place reduces the risk to your company.


There are several ways in which cash flow management helps a business.


  1. Creditworthiness and Solvency


Banks and financial organisations like positive cash flows. A positive cash flow indicates that the company's cash flows are consistent and predictable. Banks prefer to lend to these types of borrowers. 


It indicates the next installment will be paid on time and in full. Not to mention, the health of a company's cash flow has an impact on its credit score. 


Companies with a strong credit rating will have an easier time raising funds on the open market or attracting international investment. It's remarkable how simple cash management at the operational level can yield such significant results.


Also Read | Fundamentals of Corporate Financial Analysis


  1. Favorability for CAPEX and investment


Maintaining positive cash flows over time is the essence of good cash management. The theory proposes that inflows should constantly exceed outflows in order to maintain a surplus. 


Instead of sitting idle, these funds may be invested to generate income. This is an excellent example of "letting your money produce money for you." 


Furthermore, a company that invests and sets aside money on a regular basis may be able to make a CAPEX acquisition. And it's all thanks to good cash management! As a result, an effective cash flow management system relieves the burden on funds flows from operating operations to capital expenditure purchases.


How does Cash Flow Management Work?


Chief financial officers, business managers, and corporate treasurers are typically the people in charge of an organization's overall cash management strategy, stability assessments, and other cash-related tasks. 


Many firms, on the other hand, may choose to outsource some or all of their cash management tasks to third-party service providers.


The key component of a company's cash flow management is the cash flow statement


The cash flow statement is a comprehensive accounting statement that records all of the company's financial inflows and outflows. 


Cash from operations, cash paid for investing activities, and cash from financing activities are all included. The cash flow statement's bottom line indicates how much cash is easily available for a firm.


Investing, financing, and operating operations are the three elements of the cash flow statement. 


The operating element of cash operations is primarily reliant on net working capital, which is defined as a company's current assets minus current liabilities on the cash flow statement. Businesses aim to have a current asset balance that is greater than their current liability balance.


The other two parts of the cash flow statement are a little more straightforward, with cash inflows and outflows related to investing and financing, such as real estate investments, new equipment and machinery purchases, and stock repurchases, as well as dividend payments as part of the financing activities.


Also Read | Microfinance: Types, Advantages and Challenges


In the end, let us get some tips for better cash flow management.


Tips for a Better Cash Flow Management


Here is some advice we recommend following to guarantee you have a healthy financial status and avoid cash flow problems:


  • Make frequent cash flow forecasts so you can project your cash flow situation, the amount of money you'll make (guess your volume of sales, etc.) and how much you'll spend (forecast the expenses you'll have to make, how much you'll order, etc.) – and act on the results.


  • By getting their financial rating, calling on local partners for information, or using alternative intelligence, extensively research possible new clients and examine their creditworthiness.


  • Lookout for potential dangers, such as debtors, huge invoices, and loan repayment deadlines.


  • Avoid overpaying and make sensible investments. Always assess the impact of a large investment or expanding your firm on your cash flow, and investigate the sectors or markets to fully comprehend the context.


  • Maintain cash reserves by setting aside a percentage of your income to cover unforeseen expenses.


  • For better cash flow management, teach your employees basic credit control techniques (or hire individuals who do).


  • Use digital cash flow management software to keep track of invoices and expenses while also giving you a clear view of your financial status.

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