Accurate and timely cash flow management is a crucial part of maintaining any business’s financial stability. It’s also a notoriously challenging area of accounting to keep track of due to all the moving parts it involves.
This guide will help you simplify cash flow management by breaking down everything from cash flow best practices to the ways in which automation can ease the process completely. If you want to invest in more growth, resilience, and financial stability, cash flow optimization is one of the best places to start.
Understanding the basics of cash flow management
At its most basic level, cash flow refers to how much money is moving in and out of a business. Managing the process is all about tracking this movement properly and using it to both reflect and forecast financial health.
What are the main components of cash flow management?
The main components of cash flow management are:
- Inflow: Money received e.g. revenue.
- Outflow: Money paid out e.g. bills, and other expenses.
Managing cash flow properly is about tracking, organizing, and forecasting both these areas. It’s not simply a matter of counting up the numbers but also actively ensuring that all the surrounding tasks are being done promptly so that cash flow isn’t held up.
The biggest consequences of poor cash flow management
Not keeping up with your inflows and outflows can lead to:
- Late payments: This is perhaps the most common issue we see with badly managed cash flow. Without having a strong handle on what bills are coming in and ensuring you have enough money readily available to pay them with, it’s easy to miss invoice deadlines and incur late fees, etc.
- Damaged relationships with suppliers: Success in any industry is defined by how strong your relationships are with those that you work with. That’s what builds reputations and determines the opportunities made available to you. Unfortunately, another side of poor cash flow management and late payments is that it can accidentally damage relationships with your suppliers and bring down your reputation in the process. Not staying up to date with bills etc. gives the impression that a business is unreliable which can sour other dealings over time.
- Tight cash flow: Without staying on top of what exactly is coming and what still needs paying, it’s easy to fall behind on things and suddenly find yourself in a cash flow crunch with bills mounting. Proper cash flow management is all about staying organized and up to date so that this panic never hits.
- Missing out and making bad calls: That kind of tight cash flow can also lead to missed opportunities and bad decision-making. For example, if things get too tight, you may not have the necessary cash needed to buy inventory or invest in a new project, etc. Conversely, it can also pressure you to take on less-than-ideal work which could have later consequences.
- Hindered growth: It’s almost impossible to grow a business effectively if it’s always stuck chasing cash flow issues. The stress alone can hinder innovation but any feelings of uncertainty about cash flow can hold businesses back from making greater strides.
- Businesses are left exposed: Poor cash flow management can very quickly drain a business’s reserves, leaving them exposed when unexpected hiccups occur.
- Unpaid staff: One of the first consequences of poor cash flow management is that staff end up going unpaid. What’s often very frustrating for those involved is how frequently the issue isn’t the result of there not being enough revenue, but simply that those inflows weren’t tracked properly alongside projected outflows.
- General inefficiency: How well a business can manage its cash ultimately shapes overall productivity. It’s nearly impossible to keep systems running properly if they’re constantly slowed by issues like delayed payments, cash flow crunches, and unpaid staff. A business needs to be liquid and cash-confident to function properly.
On the flip side, strong cash flow management helps keep businesses financially healthy for the long run. It’s what builds reputations and resiliency, while also expanding opportunities for growth.
Cash flow management strategies
Here are 5 of the best cash flow optimization strategies that businesses can implement to ensure liquidity and operational efficiency:
- Better accounts receivable management: Inflow delays are often the result of inefficient accounts receivable management. Making sure to streamline the invoicing process, chasing up payments appropriately, and giving clients incentives to pay early all help keep the flow of money into a business running smoothly. Too often we see businesses struggling with their cash flow simply because an invoice wasn’t sent when it was supposed to be, or follow-ups were left to the last minute.
- Accurate cash flow forecasting: We’ll explore this in further detail later on, but cash flow forecasting is one of the best strategies for improving cash flow management. It forces businesses to look ahead so that they’re better prepared for possible cash crunches and pitfalls.
- Control costs: Tracking costs is a huge part of good cash flow management but it’s also important to go back frequently and check which costs are worth keeping on the books in the first place. We’d recommend at least quarterly, if not monthly reviews of your costs so that there are no unnecessary drains on your finances.
- Re-assess payment terms: Cash flow best practices often ignore this simple, highly effective task but reassessing payment terms is one of the best ways to boost things. It might simply look like asking suppliers to give you more time as you await payment on certain invoices, or for some, asking all your suppliers to fit in with standard payment terms that allow easier management on your end.
- Manage debt and credit: Many businesses fall into the trap of getting behind on payments, borrowing to cover it, and then being so far in debt that their cash flow is forced to take yet another dive, even when the revenue is flowing. Make sure you’ve got good relationships with your lenders and are negotiating favorable borrowing terms that will support your business’s cash flow, rather than hinder it.
Forecasting cash flow
Cash flow optimization isn’t just about staying on top of today’s inflows and outflows, but looking ahead and noting where potential crunches may lie so that you can plan better. Here’s what cash flow forecasting involves and how it can bring greater financial stability to your business:
Comprehensive forecasting
Comprehensive cash flow forecasting usually employs these two methods:
- Direct forecasting: Sometimes referred to as the “receipts and disbursement method”, this approach is best used for short-term forecasting to show the liquidity of a business in a specific period. It involves the analysis of upcoming receipts versus upcoming payments.
- Indirect forecasting: There are many ways to perform indirect forecasting but at its core, it’s about reviewing historical financial data to make better long-term predictions. Looking at the past is likely to expose trends in your cash flow such as common months where inflow drops off, or payment deadlines that are frequently missed and perhaps need renegotiating.
Using both methods provides a view of what’s coming up immediately, as well as what you’re likely to face based on past experiences. Many businesses take things one step further and ensure that they have a short-term, mid-term, and long-term cash flow forecast set up so that they’re better able to prioritize finances and concerns.
The role it plays in proactive financial planning
Cash flow forecasting is the cornerstone of proactive financial planning. It protects businesses from cash flow shortages and debt, and it also creates growth opportunities. If you can see what’s coming and feel stronger about your cash flow stance, it’s far easier to make big decisions about your business and possibly invest in developing new areas.
How to ensure accurate cash flow forecasting
In today's fast-paced business environment, better data management and automation are key components of accurate and reliable cash flow forecasting. By implementing advanced data management techniques and leveraging cutting-edge automation technology, businesses can gain a comprehensive understanding of their financial health and make informed decisions to optimize cash flow.
Data management plays a crucial role in ensuring that all financial information is organized, accessible, and up-to-date. With well-maintained data systems, businesses can easily track inflows and outflows, identify trends, and forecast future cash flow with greater accuracy. Additionally, automation technology streamlines repetitive tasks such as invoicing, payment tracking, and follow-ups, reducing the risk of human error and saving valuable time and resources.
By embracing technology-driven solutions for cash flow management, businesses can not only improve efficiency and accuracy but also gain a competitive edge in the market. With the right tools and strategies in place, businesses can proactively plan for future financial challenges, seize growth opportunities, and navigate uncertainties with confidence. Let us guide you towards a future of seamless cash flow management and financial success.
Embracing technology for cash flow management
New technology is changing cash flow management for the better and taking the strain off businesses in all industries. Here’s how it can help you and why it’s worth embracing:
How automation can streamline cash flow processes
Cash flow management isn’t just inflows and outflows that have to be tracked, but various tasks within that. Invoices have to be sent, bills tracked, etc. The exciting thing about automation technology is that it can take over many of those tasks, often performing them quicker and more accurately than is possible manually. The result? A more streamlined process overall.
For example, an administrative issue that causes many to stumble is having to follow up on outstanding payments. It’s one thing to send the invoice but what if your client forgets to pay it? Tracking this and making sure to contact the person promptly not only costs you time, but if it isn’t done, can bring your cash flow to a grinding halt. Automating follow-ups, however, can solve the problem and bring greater ease to your entire cash flow system.
The benefits of using accounts receivable software solutions
Accounts receivables is one of the core systems that shape a business’s cash flow and overall financial stability. Using a software solution like Chaser can:
- Improve payment predictability by ensuring faster follow-ups on unpaid invoices.
- Build a credit control process that is consistent and timely.
- Save you money in the long run because you get all the efficiency of having a dedicated staff member to monitor invoices, without having to pay for that kind of labor.
- Help your business avoid a payment backlog.
- Ultimately boost your overall cash flow because you won’t end up stuck waiting for payments anymore.
Master your cash flow
Cash flow management shouldn’t be stressful, and it certainly shouldn’t hold your business back. With the right technology and strategies in place, such as better accounts receivable systems, comprehensive forecasting, and improved cost control, you can set your business up for more than just success. You can prime it for growth.
If you’re curious about taking your cash flow management to the next level, click here to try accounts receivable automation with our 10-day free trial or here to speak to a consultant.
