Cash Flow Management
What it Means
Cash flow management is the process of tracking the flow of money into and out of your business. Where is your revenue is coming from? Where is it being spent? How do you remain financially healthy?
There are three categories of cash flow:
Operating Cash Flow: This is cash that your business generates from its core operations, which often means the sales of your products or services.
Investing Cash Flow: This includes money spent on long-term assets that will help your business grow (like machinery or property) and money received from selling these assets.
Financing Cash Flow: This includes money received from issuing equity or debt and also money paid back to these investors or lenders.
Why it Matters
Solvency: Positive cash flow ensures that a business can meet its short-term liabilities. Without adequate cash, a business might not be able to pay suppliers or employees.
Growth: A healthy cash flow allows a business to invest in growth opportunities, like new products or market expansion.
Profitability: A business can be profitable on paper, but without cash flow management, it may not have the liquidity to continue operating.
Investor Relations: For businesses seeking external financing, demonstrating effective cash flow management can be a key factor in attracting investors or securing loans.
Let's consider an example of a small design agency:
The agency receives payments from clients (operating cash flow), but these can often be unpredictable, arriving late or varying in amount.
To manage incoming cash flow, the agency could negotiate clearer payment terms, encouraging clients to pay within a certain timeframe or even offering discounts for early payment.
The agency also needs to manage its outgoing cash flow, which includes expenses like salaries, rent, software subscriptions, and supplies.
By reviewing these costs, the agency might identify opportunities to reduce outgoing cash flow, such as switching to a cheaper software subscription or re-negotiating rent terms.
Stack it - Resources & Tools
Business Advisers or Accountants: Engaging an adviser or accountant can provide expert advice tailored to your specific business circumstances.