Cash flow management is the ability of a business owner to effectively manage the inflow and outflow of cash from their business.

In simpler terms, it is about making sure you have enough money when you need it. If you’re a small business owner who calculates profits at the end of every sales but still finds it hard to pay up on bills like rent, employee salary and other necessary bills, this post is for you.

In this blog post, we’ll break down the meaning of cash flow and look at different management techniques that will help you sustain and expand your business.

Therefore, at the end of this post, you should have a clear understanding of what cash flow means with practical strategies and tips to help you manage your cash flow effectively. Lets dive in!

What Is Cash Flow?

Cash flow refers to the movement of money into and out of your business. It comprises of all transactions which include revenue from sales, expenses made, investments and other financial activities.

Cash flow is not about the money you have in your bank account, or the money saved up somewhere. It’s about the flow of money in and out of your business.

Additionally, Cash inflows refers to the money that flows into your business. This includes sales revenue, investments, loans. While cash outflows refers to the money that leaves your business. Such as: payment of rent and other utilities, expenses made, loan repayment.

Types Of Cash Flow

Operating cash flow

This is also known as cash flow from operations (CFO). This refers to the cash generated from the normal operations of the business. This includes cash generated from sales and payments made for expenses such as salaries and rents.

Investing cash flow

The investing cash flow also known as cash flow from investing (CFI) represents the cash generated or spent on investments over a specific period of time. Investing activities include the purchase of equipment, purchase of real estate or other assets and sale of those assets.

Financing cash flow

Financing cash flow refers to the cash flow related to financing activities. This is also known as cash flow from financing (CFF). These financing activities include activities such as borrowing money, repayment of loans, issuing or buying back shares.

Why Is Cash Flow Important?

Assessing cash in your business streamlines the day-to-day operations such as payment of bills and purchase of inventory.

A positive cash flow indicates that the money which flows into a business is more than the money that flows out. With a positive cash flow, business owners can meet up with financial obligations and avoid debt or financial distress.

Additionally, adequate cash flow helps in the smooth running of the business and creates opportunities for investing in new equipment or expanding business operations.

How To Manage Cash Flow As A Business Owner

We’ve looked at what cash flow is, its types and why it’s important. At this point, you already know that the inability to manage cash flow properly cn lead to business failure.

Therefore, we’ll look at ways in which you as a small business owner can manage your cash flow in order to have a positive cash flow and expand operations when needed.

Create a cash flow statement

A cash flow statement is a financial report. This financial statement is used to account for the movement of money in and out of a business during a specific period of time. This could be monthly, quarterly, yearly or whenever you choose to.

This financial report helps you to understand your revenue means and your expenses. With a cash flow statement, you can determine if your business is scaling or not.

You can use accounting software or spreadsheet to track where your money is coming from and how its been spent.

Prepare a cash flow forecast

If the cash flow statement tells you how you make and spend money, the cash flow forecast predicts future cash inflows and outflows. Preparing a cash flow forecast helps you to anticipate cash shortages or surplus.

Additionally, forecasting helps you make better informed decisions. For instance, you’re looking to get a new expensive equipment for your business. A cash flow forecast helps you determine if this is going to affect your day-to-day operations and cause a financial strain on your business.

With this information, you can decide to pay for the equipment in instalments in order not to affect the smooth running of your business.

Having an accurate cash flow statement makes it easy to prepare a cash flow forecast.

Invoice promptly in order to improve cash inflows

Send invoices immediately the work is done or the project is delivered. The inability to send out invoices after work is completed leads to slow cash inflow which is not good for your business.

Additionally, you can offer multiple payment methods and create options for flexible payments such as paying in installments. You can also enforce late payment penalties to ensure you’re paid on time.

Control your expenses

Just like we stated earlier, a positive cash flow is achieved when the money leaving your business is less than the amount flowing in. Therefore, cutting down on unnecessary expenses is one good way to manage your cash flow.

Review your cash flow statement and take out expenses that do not aid your business growth.

Furthermore, you can negotiate bulk payment discount and also negotiate extended payment terms with your suppliers in order to free up cash.

The ability to cut down on cash outflows do not only help you manage your business, it creates room for expansion and financial stability.

Regularly monitor your cash flows

Keep a close eye on your actual cash flows compared to your forecast. Look out for trends and pattern in your cash flows. Are there specific times you encounter surplus cash?

Do you encounter shortage of cash during specific seasons?

Find out where your actual cash flow varied from your forecast and find out why. Monitoring your cash flows regularly helps you to make adjustments quickly when needed.

Additionally, forecasting is not a one-time thing. Regularly update and refine your forecast process and improve your cash flow management skills.

Conclusion

Managing your cash flow effectively is essential for business growth. By understanding the basics of cash flows, its importance, why a positive cash flow creates more opportunities for a business, you can streamline your small business and take control of your finances.

Cash flow management is an important aspect of your business that shouldn’t be overlooked.

Have any questions about your small business? Drop them in the comment box.

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