Define Cash Flow Management
How to Define Cash Flow Management and Solve Cash Flow Problems
The definition of cash flow management for business can be summarized as the process of monitoring, analyzing, and optimizing the net amount of . Net cash flow is an important measure of financial health for any business.
The Importance of Cash Flow Management
According to a study performed by Jessie Hagen of U.S. Bank, 82% of due to poor management of cash flow.
If your business constantly spends more than it earns you have a cash flow problem.
For small businesses, the most important aspect of cash flow management is , caused by having too great a gap between cash inflows and outflows. You won't be able to stay in business if you can't pay your bills for any extended length of time!
Examples of Cash Flow Management Problems in Business
Real estate development has always been a highly cyclical industry and developers are often prone to cash flow problems. Property development requires significant initial capital investment as well as ongoing cash outflows for operations, and unless some or all of the development can be sold before construction, developers often run into cash flow problems before the development begins to sell off, particularly if the property market happens to soften during construction. Many property developers have been forced into due to negative cash flow for extended periods of time.
Any business that is undergoing rapid expansion can run into cash flow problems. Business expansion generally involves increasing labor costs as , increased rent for additional space, higher costs, and more for new facilities, equipment, etc. Having to maintain increased levels of can also quickly eat into excess cash.
Extending credit to other businesses is another common way for businesses to run into cash flow problems. is normally done on 30 or 60-day terms and it is not uncommon for customers to delay payment, which can leave your business in a cash flow crunch.
Here's an example of a business with cash flow management problems - the cash balance is negative for the year:
|Acme, Inc. - Cash Flow Statement for the Year Ended Dec. 31, 2016|
|Cash Flow From Operations||$|
|Net Cash Flow from Operations||$6500|
|Cash Flow From Investments|
|Equipment and Software Purchases||-$5,500|
|Net Cash Flow From Investments||-$5,500|
|Cash Flow From Financing|
|Net Cash Flow From Financing||-$8,300|
|Net Change in Cash Balance||-$7,300|
Solving Cash Flow Problems
As a business owner, you need to perform a on a regular basis and use cash flow forecasting so you can take the steps necessary to head off . Many software have built-in reporting features that make cash flow analysis easy.
This is the .
The second step of cash flow management is to develop and use strategies that will maintain an adequate cash flow for your business. One of the most useful strategies for small businesses is to so that your business can bring in money faster.
If your business is expanding, you may need one or more injections of cash during the growth phase. This can take the form of a from a financial institution (), or from investors.
Debt financing is common for such as equipment, buildings, land, or machinery where the assets to be purchased are used as security () for the loan. The main advantage to debt financing over equity financing is the business owner(s) do not have to give up partial ownership of the business and so retain full control.
For short term cash flow shortages, many small business owners make use of credit cards or .
Equity financing involves raising money from or . Equity financing is much less risky in that money invested do not have to be repaid if the business does not succeed; however, in exchange for financing the investor(s) become part owners and as such take a share of the profits and have a say in how the business is run.
Whatever form of financing is required it is vital to have an updated business plan in place to present to financial institutions or investors. The should demonstrate the need (and effect) of financing for the future of the business.
Examples: Through careful cash flow management, Monique was able to turn her bed and breakfast into a profitable business.