Cash Flow Management Critical Analysis

Cash flow management is a vital force to the success of any business, large or small. Some have compared cash flow management to the life source of the human body, the blood. Much like blood, cash keeps a business going, and cash flow is the circulatory system of a business. With this in mind, it is important to understand that managing cash flow goes beyond the generating of sales revenue. This article will aid in providing understanding of the components of cash flow management, as well as provide several key elements in successfully managing cash flow.

What is Cash Flow

Investopedia. com defines cash flow as a revenue or expense stream that changes as cash account over a given period. Cash inflows usually arise from one of three activities; financing, operations, or investing. Cash outflows result from expenses or investments. In layman terms, this simply refers to how cash moves in and out of a business. In order for a business to be successful, the goal is to insure that your inflows of cash, on a long term basis, exceed your long term cash outflows.

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Understanding Cash Inflows and Outflows

Cash outflow refers to the net amount of cash that flows out of a business based on the ongoing operations of that business. These uses of cash are usually expenses, such as payment of salaries and wages, creditors and suppliers, investments, long term business purchases, loan repayment, dividend repayment, income tax, corporation tax, and even lawsuit settlements. Cash inflows, the optimal goal for a business, are the exact opposite. Inflows are any transfer of money that comes into the business’s possession. The net cash amount that flows into a business due to the ongoing operations of the business, which is most commonly revenues, is where a business would see an inflow of cash. Some examples of cash inflow would be payments from customers, investors, lenders, sale of company real estate or equipment, as well as legal settlements.

It is logical to believe that if cash isn’t available a business can fail. This is also true if the circulation of cash is irregular and unpredictable. In order for cash flow management to be effective, a business must address both short and long term plans. With short-term cash flow management, a business relies mostly on the effectiveness of keeping good records, via a record keeping system. By utilizing a good record keeping system, a business insures quick and accurate access to revenue and expenditure transactions.

There are several different tools in which to facilitate this need, which are the use of bank statements, cash flow forecasts, reports on debt collection, and accounts payable reports, to name a few. Routine monitoring of these types of documents is important to avoid insufficiencies. Creating routines for managing the cash flow will allow a business to make forecasts that will assist in their company’s growth. The key is to continuously make sure that the business has enough sales, at a profitable price. Three main concepts to remember are:

1. Plan in advance in anticipation of certain changes in income and expenditures.
2. Monitor to make adjustments to business and financial operations.
3. Manage to “average” out the peaks and valley of cash flows.

The Use of Cash Flow Statements Financial statements help businesses successfully manage their cash flow. Such financial statements as balance sheets and income statements provide a picture of the assets and liabilities of a business. A cash flow statement is different, in that it operates as a checkbook that reconciles the balance sheet and income statement.

This statement records the business’s cash inflows and outflows during a given period. It provides information on whether or not the revenue on the income statement has been collected, however it does not show all of the business expenses because some of those expenses that have been accrued have to be paid right away. There are three main components to a cash flow statement which include cash flows from operation, investment, and financing activities. Below is a sample cash flow statement.

In conclusion, managing cash flow effectively is not something that any business should and/or could afford to take lightly. Successfully planning and monitoring of financial statements are an effective way to ensure that a business in on the right track toward their financial growth.

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