Complete Guide to Cash Flow Management

Cash flow is the lifeblood of your business. The more clogged channels, the more it can affect financial health. There are a million ways to manage cash flow, but only a few strategies that lead to successful cash flow management.

Here’s a brief overview of the process and what you can do to refine cash management workflows:

What is Cash Flow Management?

Cash flow management is tracking and controlling how much money comes in and out of a business in order to accurately forecast cash flow needs. It’s the day-to-day process of monitoring, analyzing, and optimizing the net amount of cash receipts—minus the expenses. It’s all about managing your business finances responsibly, so there’s enough cash to grow.

Effective cash management strategies help to predict how much money will be available to cover things like debt, payroll, and vendor invoices.

Cash Flow Categories

Cash can flow from and through several parts of an organization, such as:

Cash Flows from Operations (CFO)

Operating cash flow describes money flows from ordinary operations, like production and the sale of goods. This is the figure that determines whether or not a company has enough funds coming in to pay bills and operating expenses. There must be more operating cash inflows (CFO) than outflows to have long-term viability. 

Cash Flows from Investing (CFI)

Investing cash flow (CFI) is a figure that represents how much cash has been generated or spent from investment-related activities in a specific time period.

Cash Flows from Financing (CFF)

Financing cash flow (CFF) demonstrates the net flows of cash that are used to fund the business and its working capital. Activities can include transactions that involve issuing debt or equity and paying dividends. CFF provides investors with insight into an organization’s cash position and how well the capital structure is managed.

The Relationship Between AP and Cash Flow Management

Accounts payable is a central component of managing cash flow because it represents money a company owes vendors. Once the payment of a liability is due, managing the timing of those payments is what helps a business maintain a healthy cash flow.

For example, if a company is experiencing a cash flow shortage, they may choose to delay accounts payables in order to conserve cash. However, this move can also damage supplier relationships and affect credit ratings. It will even result in late fees and interest charges.

On the other hand, paying AP too quickly may have a negative impact on your cash flow. That’s because you’re reducing the amount of cash on hand for business needs. This is why managing AP is so important for cash flow management.

Effective cash management techniques mean striking a balance between paying on time and delaying transactions to maintain healthy cash reserves. A company can use a variety of strategies to balance cash flow, like negotiating new payment terms or implementing an electronic invoicing system. You can even use AP automation for cash flow forecasting and managing payment cycles.

AP Automation as a Tool for Cash Flow Management

Accounts payable automation is a powerful tool for improving cash flow management. It involves the use of technology to streamline the entire AP process, from invoice to approval. AP automation can benefit your cash flow in the following ways:

• Faster Invoice Processing: Invoices move quicker, reducing the time it takes suppliers to get paid. This helps a business maintain healthy relationships and avoid late fees or penalties.
• Improved Control and Visibility: Provide real-time visibility into the status of invoices and payments, allowing companies to monitor their cash flow and make more informed decisions about paying bills.
• Reduced Mistakes and Fraud: AP automation reduces fraud and errors by eliminating manual tasks and providing greater visibility into the entire AP process. This helps a company avoid costly mistakes and prevents fraud from impacting cash flow.
• Cash Savings: Businesses reduce the costs associated with manual processes, like printing, data entry, postage, and storage. This frees up cash for other business needs to drive growth.

AP automation like Tipalti leads to better cash flow forecasting because companies can use the data and analytics to predict future cash flow more accurately. This helps to foresee expenses and thus, make better decisions.

An AP Automation and Cash Flow Management Example

Tipalti helped Vivino centralize its multi-subsidiary AP operations and gain visibility into future cash flow.

For Vivino, Tipalti gives them a better interface to see where global cash is flowing each week and provides the full picture required for strategic planning in each of their entities.

Examples of Cash Flow Management

Example A – Short Cash

A small business has 90 days of inventory, but receivables are due in 60 days. However, the payable terms are 30 days. Cash flow projections are poor as funds are blocked with debtors and inventory, while the payables are due in a shorter time span.

To manage the cash flow efficiently, the company needs to either renegotiate payment terms with creditors, or speed up the realization of inventory and debtors. If they cannot do these things, there will be a deficit. Business owners will have to take out a business loan to reach a true cash balance.

Example B – Extra Cash

A manufacturing company has a policy to pay off creditors in 60 days, and extends a 30-day line of credit to customers. Additionally, they do not hold inventory for more than 10 days. This leaves extra cash on the table since payments are not made for 60 days, but realization of debt and inventory only takes 40 days.

In order to optimize the business’s cash flow, the company should look for opportunities to invest and grow.

Common Cash Flow Management Issues

When it comes to cash flow challenges, there are some key issues every business must face. Here are a few of them:

Cycling Industries

If you have a business in a highly cyclical industry, you can be prone to cash flow problems. This is seen a lot in real estate where the market can change at the drop of a dime. 

For example, property development requires a large amount of initial capital, as well as ongoing streams of cash flow. Unless some of the development is sold early, there will be cash flow issues, particularly if the market softens during construction. 

Variable Patterns of Revenue

If a business is seasonal, a company’s cash flow can deteriorate during the off-season. Performing a spend analysis and projecting fixed expenses is one way to keep a consistent flow of cash, year-round. This is the repetitive process of grouping procurement data, vendors, and purchases by cost to find opportunities for expense reduction and operational improvement. 

Rapid Expansion

Any company experiencing rapid growth can run into cash flow problems. Business growth typically involves higher labor costs, additional space, more capital investment for equipment, and so on. Maintaining increasing levels of inventory can also eat into your cash flow. If a business doesn’t plan properly, its growth can kill its cash. 

Lack of Accounts Receivable System

One of the most common cash flow problems a small business will see is the lack of an organized accounts receivable system. So many entrepreneurs are eager to obtain new customers that they forget about collecting invoices.

Extending Credit

Extending credit is another way a company can run into negative cash flow. Invoicing is typically done in 30 to 60-day windows. It’s not unusual for customers to delay payment to pad their own cash flows. This can leave a business in a financial crunch.

Projecting Expenses

A large struggle many small business owners face is learning how to properly project expenses and calculate future debts. A company must look at both short-term and long-term needs for effective cash flow forecasting. Cash flow and sales projection reports can show whether a business has enough money to cover operating expenses based on forecasted revenue. 

Winning Cash Flow Management Techniques 

As a business owner, you should always be looking to improve the cash flow management process. Some tasks are simple, while others may require extensive planning. To alleviate cash flow problems, here are a few tips for strategy:

Cash Flow Analysis

Perform a cash flow analysis on a consistent basis.

This starts with examining current cash flow statements, then asking a series of “what-ifs”, such as a large client moving on or unexpected expenses. By analyzing as many scenarios as possible, an organization can identify and spotlight the highest areas of risk in operations.

There are a variety of accounting software programs and apps with built-in reporting, that makes cash flow analysis a tad easier. 

Delay Outflows

Cash flow management is about developing strategies to keep an adequate flow for your business. One of the most common moves is to shorten the cash flow conversion period, so you bring in money faster. 

Cut Expenses

Bookkeepers should run a fine-tooth comb through expenses whenever possible. To leverage cash flow, put off spending unnecessary money. Hide the business credit card! All of this should be done while avoiding any late payment fees or penalties. 

A business should also examine capital expenditures. For example, repairing equipment instead of replacing it can ease outflow pressure.

Finance Large Orders

Rather than paying for large purchases outright, a business can also rely on a line of credit. Financing large orders through lenders, especially with a low-interest rate, can help leverage cash flow. 

This also helps to slim down inventories without interfering with business needs. It’s a smarter means of financial management. 

Keep Inflows Predictable

For optimal cash management, cash inflows must be timely and predictable. Invoice and collect as soon as possible. 

Offering early payment discounts and incentives to customers is one way of upping your cash flow game. You bring money in the door quicker when you reward people financially. Even 2% is enough incentive for clients to pay their bills sooner.

Accounts receivable and accounts payable must also follow up swiftly on late payments and reassess any underperforming contracts.

Escrow Services

For additional security, many companies will turn to escrow services. In this manner, a business can ensure payments aren’t delayed, especially with expensive or time-consuming projects. It’s especially prevalent with businesses that conduct shows, events, or gatherings that can be canceled at the last minute. 

Have a Backup Plan

You never know what could happen that might result in a “worst-case” scenario. Always be prepared for a cash flow crisis with a concise plan that will provide you peace of mind. This should include a place for reserve cash.

Grow Carefully

Growing too quickly is risky to cash flow and can cause shortfalls. As you ramp up to sell more, you first need to spend more. If the time between your increased cash outlay and increased sales is too long, there could be issues with future cash flow.

Use Technology

There are tools and templates available to make everyone’s job easier. This includes software dedicated to small businesses, like QuickBooks, as well as remote, cloud-based services.

Importance of Cash Flow Management

Cash management is critical for a company’s success. If the business constantly spends more than it earns, there are going to be issues with cash flow. Especially for a small business or startup. It’s your livelihood.

Investor Trust

At a basic level, a company’s ability to create value for investors is determined by its ability to maximize long-term free cash flow (FCF) and generate positive cash flows. Free cash flow is the cash a business generates from normal operations after subtracting money spent on capital expenditures (CapEx). 

Staying in Business

For a small business, avoiding extended cash shortages (large gaps between cash inflows and cash outflows) is important. The longer you go without positive cash flow, the harder it will be to stay in business for an extended period of time. 

Utilization of Funds

Proper cash flow management means no stone is left unturned. A company should always ensure the sufficiency of cash and make sure there is no underutilization of funds. There must be a balance between profitability and liquidity. No amount of money will replace astute planning.

Additional benefits for strategizing cash flow management:

• Facilitate investments and keeps people interested
• Help to plan for capital expenditure and profit margins
• Take advantage of more opportunities with idle cash
• Prepare the business for unexpected outflows
• Allow adequate availability of cash for business purposes

Cashing In

All of this boils down to one fact: cash control is essential for business success. 

One of the main reasons small businesses fail is poor cash flow management. It doesn’t matter how many sales you have in a quarter if none of that money is coming through the door. 

Focus on total cash control, which is internal control of cash, cash-related policies, and cash flow management.

Business growth requires strong corporate governance and segregation of duties. Instill a policy with authorized approvals, signature authority with limits, and bank account reconciliation. 

AP automation is the first step in modern cash flow management. Consider implementing a platform that mechanizes daily tasks, reduces errors, and projects future revenue. This is a good start to getting a handle on cash flow management and ensuring your new business is never in the red!

Streamlining accounts payable all starts with getting a handle on expenses. Tipalti can help you manage employee spend and get started automating finance today!