What is cash flow management?

Cash flow management involves the real-time management of the incoming and outgoing cash flows of your business based on current insights. It focuses on the results of your business’s income and expenses. The company receives payments from debtors, but also incurs expenses such as rent for a business property and personnel costs. A cash flow statement provides insight into the inflow and outflow of money over a specific period, revealing the financial position of your company and enabling the creation of forecasts. For example, to determine whether there is enough liquidity to make a significant investment, expand the business, or hire new employees. This highlights the importance of cash flow management in making strategic decisions for the future.

Why is cash flow management important?

Cash flow management is crucial for understanding current and future cash flows. It encompasses all activities related to optimizing cash flows to and from the business. The goal of cash flow management is to optimize the financial space of the enterprise. A positive cash flow, for instance, allows meeting short-term payment obligations and provides financial flexibility to purchase inventory, make investments, and further grow the business.

Cash flow as a metric

Effective cash flow management also facilitates obtaining financing. When applying for credit, it is essential to present an up-to-date cash flow statement. Lenders view a positive cash flow as a metric to assess the ability to meet payment obligations. Cash flow planning and forecasting make the available financial resources transparent. Additionally, cash flow management optimally manages incoming and outgoing cash flows while providing insight into investments and inventory.

Cash flow management: operational, investment, and financing

Cash flow management applies to both operational activities and investment and financing activities. Operational activities, such as purchasing inventory or paying wages, fall under business activities. Investment activities involve making investments, such as acquiring machinery. Financing activities include, for example, obtaining a business loan.

What are the tasks in cash flow management?

Tasks in cash flow management:

  • Prepare cash flow statement
  • Create cash flow forecast
  • Manage incoming and outgoing transactions
  • Manage investments
  • Manage inventory
  • Manage financing

Tasks in cash flow management include organizing incoming and outgoing transactions to ensure timely payment of invoices, optimizing liquidity. Having a clear overview of all business transactions is crucial for effective cash flow management. In addition to preparing a cash flow statement, creating and managing a cash flow forecast is important. Managing investments, inventory, and financing are also integral tasks.

Prepare Cash Flow Statement

Creating a cash flow statement provides insight into past and present cash flows. It involves summarizing all financial transactions for a specific period, such as monthly, by examining both incoming and outgoing cash flows. This provides control over the financial situation of the business.

Create Cash Flow Forecast

When creating a cash flow forecast, you estimate all financial transactions for a future period. While the cash flow statement offers insights into the current financial situation, a forecast allows anticipation of future developments as part of cash flow management.

Manage Incoming and Outgoing Transactions

Concrete cash flow management involves actively managing incoming and outgoing transactions. A crucial part of this is optimizing cash flow, achieved by implementing strict accounts receivable management. For instance, you can shorten payment terms and promptly follow up with debtors if payment is delayed. Payt software simplifies debtor management by automating debtor follow-ups, improving debtor payment behavior, and consequently enhancing the company’s liquidity.

There are other ways to manage incoming and outgoing transactions as part of cash flow management. For example, negotiating favorable payment terms with suppliers, such as paying after the fact, can be beneficial when purchasing inventory, or settling bills on the last day of the payment term.

Manage Investments

Managing investments is also a vital task in cash flow management. It ensures long-term financial stability and avoids liquidity shortages. While optimal cash flow provides room for investments, it’s not advisable to use all financial resources for this purpose, as it may risk reducing liquidity. Consider the expected return on investment (ROI) when making investment decisions.

Manage Inventory

Inventory management is another component of cash flow management. It’s important to ensure that inventory isn’t excessive if there’s a chance that not all products will be sold. Inventory management can be automated by placing orders when the current inventory is insufficient. Another method is to order a consistent quantity of products at fixed dates based on experience, suitable for businesses with predictable sales patterns, such as supermarkets.

Manage Financing

Managing financing is crucial in cash flow management, especially concerning short-term loans. With optimal cash flow, it’s possible to meet credit obligations, but negative cash flow can make this challenging. Therefore, attention to managing financing is necessary to maintain the company’s liquidity. Additionally, sound cash flow management with a favorable cash flow forecast increases the likelihood of obtaining credit from a bank.

Cash Flow Management with Cash Pooling

Companies with subsidiaries or branches abroad may require additional attention to cash flow management. If all company entities have separate accounts, efficient cash flow management becomes challenging and time-consuming. Cash pooling provides a solution by centralizing management through a single account. This allows for easy creation of a cash flow overview, similar to managing a single business.

Pitfalls in Cash Flow Management

In cash flow management, it’s crucial to prevent deterioration of the company’s liquidity position. Several pitfalls can lead to poor cash flow. For instance, being overconfident and overspending in relation to financial capacity and cash flow forecast can be problematic. Another pitfall is the absence of a buffer in the company to handle unforeseen expenses.

Overly Positive Estimation

An overly positive estimation in a forecast can lead to future cash flow problems for the company. Another pitfall is creating a cash flow overview with a forecast only once and not maintaining it. Cash flow management is a continuous process. Allowing accounts receivable management to deteriorate is also a pitfall, as debtors have a significant impact on the company’s liquidity.

Blind Trust in Creditworthiness

When entering into new collaborations, blindly trusting a company’s creditworthiness is a pitfall. If a company turns out to be less creditworthy than initially thought, it can lead to problems, including a potential negative cash flow. Therefore, adding the task of conducting a creditworthiness check is essential to cash flow management. Payt software also facilitates checking the creditworthiness of companies for added convenience. Periodically assess the creditworthiness of companies with which you already have a business relationship, as situations can change unexpectedly.

Choose Cash Flow Management with Payt

Payt offers software for optimal cash flow management, providing complete control over cash flows. Financial stability is crucial for a company’s existence, and automated processes play a significant role. Effective cash flow management is essential for businesses.
Allowing invoices to remain unpaid without taking action is detrimental to liquidity and business operations. Payt’s cash flow management is designed to optimize accounts receivable management. The software also provides extensive insights and the ability to create forecasts, offering all the tools to improve your company’s cash position. Payt is easy to integrate with your accounting software.

Aida Kopijn
Written by Aida Kopijn LinkedIn profile
Aida Kopijn is responsible for marketing at Payt. In particular, she focuses on organising events and fairs. She is also very precise and regularly drops her critical eye on content texts to make them even better.

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