Why is cash flow management important for a business?

Cape

‘Cash is king’ is a term thrown around a lot. But despite the famous saying, cash flow is often an area of business that is neglected. 

In fact, cash flow management can be the deciding factor in your business’s long-term success. No matter what stage your business is at, having a proper cash flow plan will help you hire the best talent, fund your upcoming projects and keep bad debt at bay. 

The importance of cash flow comes down to two simple things: having a clear view of the money coming in and money going out of your business. Let’s dive into how to navigate cash flow management and why this needs to be a priority for you as a founder or finance team. 

Cash flow 101

When building or scaling a business, you’ll need to be aware of three different types of cash flow: 

  • Operating cash flow is the net cash generated from a company’s regular business operations.
  • Investing cash flow refers to the net cash generated from a company’s investment-related activities. This can range from investments in securities, the purchase of physical assets, or the sale of assets. 
  • Financing cash flow refers to how cash moves between a company and its investors, owners, or creditors.

You may have a high profit overall, but if incoming cash flow is low (or worse, non-existent) you can run into problems. This can be especially true for new businesses or startups that need capital or available cash flow to buy stock, hire employees, or build the first iteration of a product.

So it’s essential to keep an eye on your cash flow alongside your profit. How can you do this? Simple: through cash flow management. We’ll look at how you can easily manage your cash flow to improve your business processes and set your company up for long-term success.

What is cash flow management?

Cash flow management involves managing all the cash coming in and going out of your business. It helps you identify how much money you need to cover debts, outgoings and future growth. 

It might sound simple enough, but there are a few reasons why small or even large businesses may overlook this crucial part of their financial plan. 

Some of the common roadblocks or challenges startups face when it comes to cash flow management include:

  • Allowing too many charges  on credit and racking up a hefty debt bill that can’t easily be repaid.
  • Generating low profits and not having access to functional credit; slowing business performance and growth.
  • Not using a cash flow statement so your team doesn’t have clear oversight of the money coming in and out of the business. 
  • Insufficient cash reserves and not having enough available cash to invest in the best opportunities that will drive your business further. 
  • Receiving partial payments and not having the processes in place to proactively chase up payments in full. 

Why is managing cash flow important?

Cash flow management is one of the most crucial aspects of any business’s finance function. 

Positive cash flow indicates that a business’s liquid assets are increasing. This enables your business to reinvest, return money to shareholders, pay expenses, and have a savings buffer for any financial challenges that might crop up. 

On the flip side, negative cash flow means that liquid assets are decreasing. This can make it difficult to cover your operating expenses and hire the talent you need to grow your business.

Essentially, managing your cash flow enables you to proactively anticipate risks, build contingency plans and identify any cash leaks to boost your chances of profitability. It’s all about making sure every dollar is accounted for and spent wisely. 

What are the steps of cash flow management?

Managing your cash flow doesn’t need to be complicated or confusing. In fact, with the right budging tools in place you can easily understand your business’s financial position and make faster, informed decisions.

Here are five easy steps to help you better manage your cash flow:

  • Use accounting software to gain greater visibility over the cash coming in and out of your business in real-time. 
  • Ensure your transactions are reconciled on a regular basis so you can keep your books and records up-to-date. 
  • Set clear payment terms that work for your business and ensure these are enforced with regulator debtor chasing. 
  • Use a tech-driven budgeting tool that allows you to set spending limits, track budgets and receive alerts when unexpected transactions occur.
  • Build a cash reserve to cover at least three months of expenses. Plus, make sure your business has access to functional credit to help you jump on the best opportunities.

Final thoughts

Improving your business’s cash flow management will help you make proactive, informed decisions to drive your business further. Once you’ve got the basic principles of cash flow harmony in place, you can look to power up your team with an automated expense management platform

At Cape, our expense management platform does the hard work for you by automating your expense policies, setting spending limits for each team and allowing you to monitor expenses and cash flow in real-time. 

Join Cape today to experience complete expense nirvana!