Cashflow Management

Cashflow management is the process of monitoring, reviewing and regulating a company’s cash flows. Cash flow is to a business what oxygen is to human beings. Cash flow management helps a business survive and prosper and is the main indicator of a company’s financial health. Cash flow management helps to strengthen a business through the timely estimation of overall cash inflows and outflows. Cash flow management also helps avoid cash shortages.

Cash inflows are realized through the sale of goods and services to customers. Cash outflows take place through operating expenses, the purchase of fixed assets, loan repayments, dividend payment and taxes. By managing cash inflows and outflows, it is possible to maintain a specific amount of cash at all times.

How Does Cashflow Management Work?

Cashflow management is based on the estimation of inflows and outflows. It is a technique to hasten cash returns and delay payments. For a business, cash flow management includes the following steps:

Making financial projections: Cash forecasts include estimating expenses and revenues. These projections help in anticipating when a business would need cash and when it will have surplus reserves. Typically annual cash forecast is made.

Contingency plans: Emergency plans consider the best and worst scenarios. The money cycle is complex and delicate and, therefore, difficult to predict. Hence, it is crucial to remain prepared for adversities.

Cap on spending: Spending within the budget is important for any enterprise to sustain its cash reserves. Spending on unprofitable ventures can challenge the financial soundness of an enterprise. So, curbing and optimizing spending are key to cash flow management.

Limit inventory: The excessive accumulation of inventory may lock cash for long periods. Cash management propagates keeping only that much inventory that can be sold in a short span of time.

Raising invoices: Promptly raising invoices helps in managing cash flows. An enterprise can devise a policy to declare customer payments within the stipulated time. They can also ensure continuous follow-ups on overdue receivables.

Benefits of Cashflow Management

Efficient cashflow management offers the following benefits:

• It can help a company identify when it will require cash and devise ways of generating the same.
• It provides an understanding of when to put a freeze on investments, such as venturing into new projects, business expansions and employee hiring.
• It aids enterprises in planning for loans.
• Cash flow management helps in eliminating uncertainty associated with the availability of cash balances.
• It improves the visibility into cash flow issues.