What is cash flow?
Before we explain cash flow management, we need to understand what cash flow is. By definition, it’s the difference between cash inflows and cash outflows that a business receives and disburses during a specific period of time. When more cash is coming in than going out, it’s called ‘positive cash flow’. When the opposite is true, it’s known as ‘negative cash flow’.
The challenge of cash flow management
For many business owners, the management of cash is an ongoing issue. The problem stems from the time period between producing and delivering products or services and receiving payment. If a business manufactures products, for example, it needs to purchase materials and pay staff to get the work done. It also has to fixed expenses such as for its premises and equipment. After products are produced, it can take several months before the products are sold and paid for. Problems managing your cash are compounded when purchasers don’t follow payment terms and make late payments.
Regardless of the type of business, there will always be a gap between creating and delivering a product or service, and getting paid for it. The bigger the time gap between spending and receiving funds, the worse it will be for the company’s cash flow. It the problem gets too serious, it can lead to bankruptcy if not addressed by getting the amount of cash needed. A fast-growing business can appear to be successful but can fail as a result of negative cash flow. This problem is known as overtrading.
Fortunately, there are several cash flow management steps that can be taken to manage your cash flow so you can pay your bills.
Create a cash flow statement to improve financial management
A cash flow statement tracks money flowing in and out of a business. It usually shows cash flows on a monthly basis so you can see seasonal fluctuations. For example, a retail gift business that makes a large percentage of sales before Christmas will have to purchase more inventory before the holidays. Although the money will eventually come in through increased sales, these large stock purchases can lead to negative cash flow before the sales are made. With a cash flow statement, you can prepare for cash flow fluctuations before they occur and have more effective cash flow management.
Here is an outline you can use to begin creating a cash flow statement:
Opening balance (use your bank balance at the beginning of the month as a starting point. In following months, this number will be the closing balance from the previous month).
Accounts receivable collections
Total cash inflows (add up all incoming cash items above)
Advertising and marketing
Bank fees and charges
Credit card fees
Membership and subscription fees
Motor vehicle expenses
Purchases (stock, etc)
Rent and rates
Repairs and maintenance
Stationery and printing
Utilities (electricity, gas, water)
Wages (including PAYG)
Total cash outflows (add up all outgoing cash items above)
Monthly cash balance – net increase or decrease in cash (calculate total cash inflows minus total outflows)
Closing cash balance (calculate opening balance plus total cash inflows minus total cash outflows.)
Here’s a template you can use to help you create a cash flow statement for cash flow forecasting.
If you use accounting software, you will be able to create a cash flow statement using the program. Besides using this document for managing cash flow, it usually is included in business plans when seeking business finance from a bank.
Plan ahead using your cash flow statement
Once you complete your cash flow statement, you can look for problems and plan ahead. In some months you might have more cash going out than coming in. Once you spot the problem you can take steps to prepare.
Get control of credit with policies and procedures
An important part of implemening good cash flow management includes controlling how and when credit is granted. In effect, customers are borrowing money from you when you give them credit. If you have customers who are consistently slow in paying their invoices, you will want to find a way to speed up their payments, change their credit terms or find new customers who are more reliable so you can get paid on time. It will also help by making it easy for customers to pay you. For example, excepting credit cards will make it possible for some customers to pay you sooner.
When taking on new customers, credit policies and procedures will prevent late payments and bad debts. Make sure new customers complete a credit application that includes at least three references. Contact these references to determine if the new customer is a reliable payer. Good cash flow management begins with effective credit policies and procedures.
Take action to get paid faster
There are several steps you can take to get paid faster. You should invoice for products and services immediately. If you don’t send an invoice right away, it sends the wrong message to your customers. Due dates on invoices should be prominent and clear. Follow up quickly and contact customers when invoices are overdue. When invoices are seriously overdue, a collections agency can help you get your money faster and improve your cash flow management.
Negotiate with suppliers to extend payments
While working on speeding up payments, you can ask suppliers if they can extend payment terms. If you are on 30-day terms, you can ask to extend these to 45 or 60 days. This will enable you to keep money longer while waiting for cash from sales to come in.
Seek discounts on your purchases
For things you purchase regularly – including raw material, rent and professional services – ask for discounts. It doesn’t hurt to ask. If you make large purchases from a vendor, you are more likely to get a discount and make progress with cash flow management.
Get an unsecured business loan to cover cash flow shortages
A growing number of businesses are turning to unsecured short-term loans to improve cash flow management. Fintech lenders such as Moula have simplified the process to make it easy to get a loan quickly. Instead of completing large amounts of paperwork and waiting several weeks for a reply, Moula’s online application takes around ten minutes to complete. Based on the information you provide, plus a safe and secure analysis of your business data, you will receive an answer within 24 hours. If your loan is approved, the funds will be in your account the next business day.