Cash Flow Management

Cash is as vital to a business as water is to people. Poor management of this crucial source can drive even a profitable company out of business, especially in times when the economy is struggling.

For new and expanding businesses in particular, the risk of finding themselves short of cash needed to pay suppliers and employees is immense. Good cash flow management, on the other hand, can help business owners avoid situations where opportunities arise but they are temporarily out of cash.

Cash flow management is all about controlling the ‘cash flow cycle’. The cash flow cycle is the length between the payment of what a business owes (payables) and the collection of what a business is owed (receivables).

Businesses can use various techniques in order to minimise the amount of time funds are ‘tied up’ in order to reduce the amount of working capital needed for operations.

Do you understand why profits and cash are not necessarily the same? Do you monitor your cash position daily?

In order to efficiently manage your cash, the best action you can take is to understand the key terms and techniques of cash flow management and decide how they could be applied to your business.

  • Cash flow projections
  • Avoiding bad debts
  • Better financial control
  • Avoiding the cash flow crunch

Cash Flow Projections

An essential element of cash flow management is a cash flow projection. Cash flow projections help businesses to prepare for potential cash shortages by:

  • Maintaining adequate cash reserves to pay bills, expand the business and make capital improvements
  • Reduce interests costs through managing borrowing
  • Increase interest income by shifting funds into higher-interest accounts
  • Receive discounts through bulk purchasing
  • Improve relations with the bank

By preparing a cash flow projection for you can also gain better knowledge of your business’s system, for example you may learn a way to time payments to suppliers more beneficially.To start up your own cash flow projection, a simple system can be set up by creating a spreadsheet to track cash flowing in and out. A more sophisticated analysis might include monthly cash projections for the next 12 to 18 months.

First, forecast your operations on a monthly basis for the period involved. You can project the cash coming in based on sales and the collection process. Material purchases are based on the amount needed for sales, adjusted according to variations in your stock levels as a result of turnover. Finally, payments to suppliers and expenses need to be taken into account, based on the payment due dates. Once you’ve projected your cash flow based on this forecasted data, you can budget for capital expenditures, unusual sources of cash or other things that might affect cash flow.

Avoiding bad debts

Having bad debtors is damaging to cash flow and can be extremely dangerous for any business.

Techniques to avoid bad debtors include:

  • Obtaining a credit reference on the organisation that you intend to trade with
  • Avoiding doing business with companies whose credit rating is poor
  • Ensuring that the other company knows your payment terms at the outset
  • Invoicing at the earliest opportunity
  • Stating the payment terms clearly on your invoice
  • Sending a reminder as soon as possible, if payment is not received by the due date and having a policy to chase the debt after a fixed number of days following the due date
  • Chasing up the debt by telephone if there is still no response. This will enable you to determine whether there are any queries on the invoice and, if not, to discuss a date for the settlement
  • Writing to confirm the agreed settlement date and send by fax or post
  • Stating clearly that the matter will be referred (after the agreed extended period) to either a debt collection agency, a firm of solicitors, or the county court small claims department

Better financial control

Business people recognise that generating healthy cash flow requires a substantial amount of control of your finances. This is achieved by:

  • Deciding which areas you need to monitor and how frequently
  • Generating the numbers quickly and accurately
  • Sharing the results with everyone who needs to know them
  • Interpreting the numbers correctly
  • Taking appropriate and timely action based on your interpretations

The starting point is to set up a system that enables you to generate accurate reports as quickly as possible – certainly no later than ten days after the month closes.

To be fully in control, you need information on what is happening to your business

now, not what happened weeks or months ago. This can be achieved by setting up a system of weekly or even daily updates of key areas such as sales, debtors, cash position, trade creditors, and employment figures.

One of the most valuable instruments of financial control is drawing regular comparisons between projections and results. Not only does this keep you up-to date on how your business is doing, it also reveals how realistic your expectations are and how in touch you are with the essentials of your business. For best results, you should draw up projections for a six-week period and then set new projections at the four-week point.

Avoiding the Cash Flow Crunch

Every business, particularly if it is small, has the potential to improve its cash position often with little or no investment. The key is to make an objective assessment of the company’s financial policies, searching for inefficiency in its cash flow.

By focusing on managing the following areas, businesses can get maximum benefit from the company’s pool of cash:

  • Managing receivables and payables
  • Inventory financing
  • Trimming overhead costs

Receivables & payables

Managing receivables and payables is all about getting cash in the door as fast as possible, cutting costs, and making payments as late as possible. By accelerating receivables and stretching out payables, businesses are in a much better position to control their cash flow.


An unfortunate fact of any business transactions is that customers will often postpone their sales as long as possible. Cash management, on the other hand, requires the timely collection of every sales dollar. An assertive collection program is therefore essential in managing your business’s cash balance.

Assertive collection requires:

  • An initial screening of customers before they are granted credit.
  • Establishing a firm written credit policy and letting every customer know in advance the company’s credit terms. For example; When will you invoice? How soon is credit due? Will you add a late charge?
  • Taking immediate action if an account becomes overdue
  • Depositing customer checks and credit card receipts daily. Some banks allow owners to deposit directly into interest-bearing accounts.



The timing of payables is just as crucial to proper cash management as the timing of receivables; however, the objective is just the opposite. Business managers should attempt to stretch out payables as long as possible without damaging the company’s credit rating. If the company’s credit rating is damaged suppliers may begin demanding prepayment which will severely damage the company’s cash flow.

Companies who are successful in avoiding this whilst stretching out their payables often do things like:

  • Take advantage of cash discounts vendors offer. A cash discount offers a price reduction if the owner pays an invoice early
  • Negotiate the best possible credit terms with suppliers. Most vendors offer trade credit.
  • Scheduling controllable cash disbursements so that they do not come due at the same time (for example, paying employees every two weeks rather than every week, reducing administrative costs).
  • Using business credit cards wisely. Avoid cards that change transaction fees as some change interest from the date of purchase but others only from the invoice date.

Inventory financing

How much are you spending on goods and materials? Do you have too much in stock?

Inventory is a significant investment for any small business and can create a severe strain on cash flow. Surplus inventory yields a zero rate of return and unnecessarily ties up the firm’s cash.

Businesses can avoid these common problems of inventory managements in a number of ways, including:

  • Marking down items that don’t sell well. This will keep inventory lean and allow it to turn over frequently. Although volume discounts lower inventory costs, large purchases can tie up the company’s valuable cash.
  • Avoiding overbuying inventory. It is important to recognise that excess ties up valuable cash unproductively.
  • Scheduling inventory deliveries at the latest possible date. This will prevent premature payment of invoices.
  • Purchasing goods from the fastest supplier in order to keep inventory levels low

Trimming Overhead Costs

High overhead expenses can strain a firm’s cash supply to the breaking point. Business owners can trim their overhead costs in a number of ways:

  • Lease instead of buy. Automobiles, computers, equipment and other assets can be leased and will help you to avoid large capital outlays frequently regarded as down payment.
  • Avoid nonessential outlays. Ostentatious office equipment and flashy company cars can be forgone to make efficient use of the company’s cash.
  • Control employee advances and loans. Only grant advances and loans that are necessary, keeping records on payments and balances.

Establish an internal security and control system. This helps to avoid problems such as employee theft.

Not quite sure yet?

Let's have a chat

Scroll to Top