Importance of Managing Incoming and Outgoing Cash for Your Business Growth
Understanding of the basic concepts of cash flow management allows businesses to estimate the amount of cash inflow and outflow […]
Understanding of the basic concepts of cash flow management allows businesses to estimate the amount of cash inflow and outflow at any given point of time. It may also help in evaluating the potentially occurring shortfalls or surplus in their business.
Keeping an eye on outflow and inflow of cash is an important task for any business. Outflow includes the checks you write each month to pay salary, amount you pay to creditors and suppliers, maintenance, miscellaneous, etc. Inflow is the revenues you receive from your customer, lenders, and investors.
Areas of cash outflow are categorized in to 2 components:
Operating cash flow or working capital – It is the cash flow spent by the company on internal operations. It is a type of cash outflow which has to be kept under control, in order to improve the productivity. Basically, it will be the everyday expenditure of a company to generate revenues.
Investing cash inflow is used on currently non operating activities, like investing cash on a new plant or equipment, or on other fixed assets. This money is spent to implement the business expansion strategies.
Areas of cash inflow can be categorized in 2 types:
Financial cash flow is the cash obtained from external sources. It can be payments from investors, lenders, and shareholders. Activities included in this cash flow are issuance of stock, repayment of loan, and payment of dividend.
Operational cash flow is basically the revenue generated by a business and a cumulate of all operational efforts.
Types of Cash flow:
Positive Cash flow - This happens when the inflow of cash through sales, account receivables, etc is more than the outflow of cash through salaries, account payables, and monthly expenses, etc.
Negative Cash Flow - It happens when outflow of cash is more than the inflow of cash. It is a bad situation for any business, but you could avoid it with proper cash flow management planning.
What to do for practicing good cash flow management?
Following steps are involved in cash flow management:
- Know about the needs of cash like when, where, and how much you need to invest
- Which is the best source to meet the additional cash needs
- Maintain good relationships with bankers and creditors in order to meet your ongoing financial needs.
How cash flow can be improved?
Speed up the Processing of Receivables - Small Business Administration (SBA) methodologies suggest several steps for speeding up the processing of receivables. Post box services need to be provided by banks to help the customers of far flung areas, so that they could mail their payments and banks would be able to process the check more quickly. Businesses should centralize their banking at one bank. For encouraging timely payments from customers, you can launch some compelling plans with discounts.
Increase the sales - For increasing the cash inflow you will need to increase the sales of your products or services. It is the bottom-line for any business. You will need more money for acquisition of new customers and to convert your prospects into sales. It is easier and a lot cheaper to sell more to your existing customers. Try to do your selling on cash and not on credit, although it will be unavoidable in certain cases.
For business development, it is necessary to prepare a documented cash flow projection. For managing daily cash flow, short term (weekly or monthly) cash flow projection should be developed. For managing capital strategy for business needs, long term (3-5 years) projection must be developed.
For a better cash flow management, you could also follow the best practices adopted by other businesses. In short, cash flow management is nothing but delaying the costs of cash for as long as possible and encouraging the concerned people to make payments on time.
Ralph McGill is a business consultant, and he also likes to read about the leadership insights provided by experts like William Lauder Estee Lauder. In his posts, he explains various ways in which businesses can be run more profitably.