Cash Flow: 7 Essential Steps for Successful Cash Flow Management

Finance and Accounting
Özge Tüblek
September 23, 2023

What is Cash Flow?

Cash flow, in its most straightforward definition, refers to the money that comes in and goes out of a company over a specific period. One of the most common mistakes when it comes to managing cash flow is to assume that you're doing well simply by subtracting cash expenses from cash revenues. However, this method doesn’t provide a complete view of effective cash flow management.

To avoid falling into this trap, you need to take roughly three more steps after subtracting your cash expenses from your revenues: Monitoring, analyzing, and optimizing. When you manage these processes effectively, your company is ready for growth because you'll know when you have enough cash to expand, seize opportunities, and your risks are considerably low.

Just like blood brings life to our organs, a good cash flow strategy strengthens our company. The more clogged our channels are, the more our financial health is at risk. What's worse, we may not even notice it until symptoms appear.

What Does Proper Cash Flow Management Bring to Companies?

If you have an effective cash flow strategy, you can predict your debts, employee costs, and bills within specific time frames, thereby making projections and future-oriented decisions.

Managing cash flow healthily is crucial for every business. But in some cases, poor cash flow management can be as damaging as harming a vital artery. Let's make this more visible with a few examples:

In some industries, a minor market fluctuation can cause massive cash flow problems. For example, in the construction sector, not only does a project require a large initial capital, but the more a construction project is delayed, the more likely it is to experience unforeseen cash flow problems.

Seasonal businesses face a similar situation. Even though revenue is generated during the season, cash flow needs to be managed year-round, as expenses continue throughout the year. This puts predictability at risk and makes things like expense analysis, operational improvement opportunities, and supplier data more critical than ever.

However, knowing the risks in your sector isn't enough. Both big and small companies have a fundamental aspect to pay attention to: Invoice and payment tracking. While large companies usually manage this process well due to their resources, small businesses often overlook it. They focus so much on finding customers and doing business that they forget about invoicing and keeping track of payment timelines, leading to delayed or uncollected payments.

Suppose your company is growing rapidly. In that case, your employment costs are likely increasing at the same pace. Depending on the nature of your business, you might also need more capital investment for equipment. Adapting to rapidly increasing costs is not easy, and if you don’t have a healthy cash flow plan, you risk depleting all your cash while trying to grow.

Whether you're a new company or a 15-year-old player in the market, whether you're trying to get your first customers or have already met your customer targets, cash flow management often turns out to be one of the most critical issues for companies. For effective cash flow forecasts, you must look at both short-term and long-term needs. Cash flow and sales forecast reports can show if a business has enough money based on projected revenue to meet its operational expenses. While there are countless ways to manage cash flow, a few easy but effective strategies can lead to success. Let's take a look at these strategies together.

7 Essential Steps for Successful Cash Flow Management

  1. Create Cash Flow Scenarios: It's always better to formally analyze your current cash flow situation rather than manage it based on assumptions. Convert your cash flow into daily, weekly, and monthly tables. Add hypothetical "what if" questions to these tables to analyze multiple scenarios. This approach helps you identify high-risk areas in your operations. Consequently, you'll know exactly what to do in case of unexpected events, thereby minimizing their negative impact.
  2. Shorten Collection Periods: Managing cash flow is not just about monitoring but also about strategizing. Delayed collections could affect your ability to replenish stock and may even devalue due to inflation over time. It's crucial to track the average collection period for your entire company and per customer. This allows you to take measures before late payments become irreversible.
  3. Spread Out Large Expenditures: Large one-time expenditures like equipment investment or bulk service purchases should be carefully managed. Even if you have the cash on hand, paying all at once could create short-term cash flow problems and opportunity costs. Financing such expenditures at a low interest rate might be a smarter move, but make sure to carefully weigh the risks.
  4. Secure Payment Commitments: For long-term projects that result in payment at the end, it's a good idea to secure upfront and milestone payments. This minimizes risks in expensive or time-consuming projects. This approach is commonly used in businesses organizing events, shows, or meetings that could be canceled last minute.
  5. Have a Backup Plan: Always be prepared for the worst-case scenario. Keep in mind that your worst-case projection may not actually be the worst that could happen. Have a good plan that gives you peace of mind and always be prepared for a cash flow crisis by setting aside reserves during profitable periods.
  6. Be Cautious While Scaling: Rapid growth can be risky from a cash flow perspective. An increase in sales often leads to increased expenses. If there's a time lag between the rise in your cash expenditures and sales, you're likely to encounter cash flow issues in the future. Here, monitoring, analysis, and optimization steps become crucial.
  7. Leverage Technology: Tools are available to make everyone's job easier. While you could track your cash flow using an Excel sheet, research shows that 9 out of 10 such sheets contain errors. For instance, a simple mistake cost JP Morgan $6 billion in 2013. Using a specialized platform like Nuvio for cash flow tracking and management can help you avoid the hassle of dealing with tables or formulas. By choosing a robust analytical tool like Nuvio, you can eliminate human errors and reduce the time and money spent on cash flow management by up to 80%.

By implementing these steps, you can improve your cash flow management practices, making your business more resilient and sustainable.

Özge Tüblek

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