What Is Cash Flow Management? Everything You Need to Know

Whether you’re a new business owner or a seasoned entrepreneur, cash flow management is a crucial skill to acquire when running a business. According to an article by Business Insider, mismanagement of cash flow causes 82% of businesses to go bankrupt and close down their operations. 

This article will explain what cash flow management is, why it is important, and how to manage cash flow and share some actionable strategies and real-world case studies.

Before we begin, here are 6 additional cash flow management facts that you should know about: 

1. 60% of small business owners feel they aren’t very knowledgeable about finances.
2. 69% of small business owners are concerned about cash flow to the point that it keeps them up at night. 
3. 64.4% of US SMEs use accounting software.
4. A survey conducted by Cashforce shows that 34% of financial executives ranked “cash flow forecasting” as the most important issue for their company.
5. 77.7% of small business accountants offer value-added services like cash flow consulting. 
6. 49% of finance professionals are concerned that their cash flow data is unreliable.

What Is Cash Flow Management?

Cash flow management refers to the monitoring, analyzing, and optimizing of incoming and outgoing cash. Every company has cash flow and being able to manage the cash inflows and outflows of your business’s finances is one of the most important ways to profitably scale your startup company.

But before knowing what cash flow management is and how to manage it, you must first know what cash flow is. To put it simply, cash flow is the ins and outs of cash over a period of time for a specific business.

Cash flow is usually analyzed from a cash flow statement which is a piece of financial statement that could give insight into your company’s business activities & overall financial performance.

These financial reports, as well as the balance sheet and income statement, play an important part in managing a company’s finances.

Cash flow management starts from understanding your financial environment and using that information available to pivot or make a sound business decision. Cash flow management involves maintaining an adequate cash balance to meet short-term financial obligations such as salaries, operational expenses, and product costs. 

Why Is Cash Flow Management Important?

Cash flow management is important because it ensures that a business has enough liquid assets to cover its short-term obligations. Managing their cash flow also means that a business can maintain its day-to-day operation and cover its expenses. Effective cash flow management allows businesses to navigate through economic downturns and unstable market conditions. 

What Is a Cash Flow Statement?

The first step in managing cash flow is through understanding your current cash flow. Without truly understanding your numbers, you are essentially setting yourself up for failure. In addition, being on top of your finances will give you a big-picture overview of where your company is at and where it is going.

The cash flow statement is a piece of financial statement that summarizes the movement of cash that comes in and out of a company. This statement will help you understand your business’s cash inflows and outflows on a monthly, bi-monthly, and yearly basis.

There are three types of cash flow that you need to understand:

1. Operating Cash Flow

The first is operating cash flow. An operating cash flow is the amount of cash generated by a company’s general operations. This statement will include information on the net income, non-cash expenses, changes in working capital, pay expenses, and finally, a statement of cash generated by operating activities. 

2. Investing Cash Flow

Investing cash flow includes all purchases of capital assets and investments in other business ventures. These are related to a company's investment in long-term assets and securities. This includes capital expenditure, proceeds from sales and investments, and loans to others/loan repayments.

3. Financing Cash Flow

The financing cash flow section of a cash flow statement shows transactions associated with a company’s financing activities, which include a company’s interactions with investors and creditors to raise and repay capital.

In addition to these three statements, there is what you would call a reporting period which refers to a specific time frame in which the cash flow statement is presented.

Why Is a Cash Flow Statement Important?

Understanding Your Business’s Liquidity Potential

A business’s liquidity means how much available cash you have, which will determine whether you have enough cash to cover your operating expenses. Your liquidity potential will determine your spending potential due to having enough reserve cash.

Analyze Performance Trends

Using the statement, you can see fluctuations in your business operations which can be used to help you identify trends. Consistent positive cash flows can indicate a healthy business, while a negative trend in your cash flow statement may indicate financial challenges ahead.

Forecasting and Planning

Using a business’s past cash flow data, you will be able to forecast future cash flow, which will be crucial for financial planning and budgeting. This can be used to help generate positive cash flow in the future.

How to Start Improving Your Cash Flow Management

There are a multitude of things a business can do to further manage its cash flow,  here are our top five picks:

1. Improving Invoicing and Payment Collections

Making sure that your clients are paying you on time, following up on customers who are past due payments, and making sure that the information in your invoice is accurate and timely can help you manage your cash flow better. 

2. Negotiating Favorable Payment Terms

Work with suppliers and vendors to create favorable payment terms. When a company can make delayed payments, they have more cash in their bank account to invest in other activities. This is beneficial in generating short-term cash flow.

3. Improve Inventory Management

Optimizing inventory management can help prevent overstocking, which will, in turn, reduce holding costs. You can also consider discounting slow-moving items to sell them in order to free up your inventory.

With low overstocking and a minimization of holding costs, businesses can focus on selling higher-margin products, which will lead to higher profitability and, in turn, higher cash flow.

4. Utilizing Modern Cash Flow Management Tools

Cash flow management tools are already available within most accounting software that you use. Most tools already come with built-in features that help with forecasting, expense tracking, and mapping financial data. Here are some suggestions: 

• Quickbooks
• Xero
• Float
• SAP
• Pulse
• Wave

5. Diversifying Income Streams

Your income streams are very well dependent on the market and economy. Perhaps consider diversifying your services to reduce your dependency on a group of clients. You can explore new markets to increase your revenue stream.

💡Tip: Here are 10 tips on how to manage cash flow for your business.

Examples of Successful Cash Flow Management

A rule of thumb to follow for cash flow management is to keep your expenses low and your output high. Let’s study some of the world’s most successful cases of cash flow management.

Apple

In the late 1990s, Apple was on the verge of bankruptcy. Today, it’s one of the most commonly heralded case studies by analysts that highlight successful cash flow management because, by the end of 2023, they have achieved $110 billion in operational cash flow, according to Forbes.

Back in the 1990s, they were facing negative cash flow, and just weeks before everyone had to go home, Steve Jobs was reinstated as the company’s CEO. During that time, Apple’s stocks were at an all-time 12-year low.

What did Jobs do to set a precedence for successful cash flow management? He firstly canceled 70% of Apple’s products that were not generating a profit or were not valuable to their customers. 

The second thing he did was to streamline their product line, which only offered 4 products, a total of 2 desktop computers and 2 portable devices. He focused Apple’s efforts on its core competencies and strengths as a company.

In just 3 years after Jobs came back to the company, Apple reported a quarterly sales volume of 1,350,000 iMacs which was an impressive product being sold every 6 seconds. As you can see from this case study, examples of cash flow management have always been focused on client acquisition which will result in profitability. 

The Key Takeaway From Apple

Apple went from a negative cash flow to a positive also through cutting unnecessary spending yet, at the same time, maintaining a balance of risk-taking through developing new and innovative products in the iMac and iPod. Poor cash flow management resulted in Apple's near bankruptcy, proactive cash flow management resulted in it being valued as one of the most valuable companies in the world.

P&G - Proctor and Gamble

Procter & Gamble, a consumer goods giant, is known for its effective working capital management and cash flow discipline. The company's focus on strong brands and operational efficiency contributes to its consistent cash generation.

There are three distinct reasons why Proctor and Gamble has a record of strong cash flow management:

Diversified Product Portfolio

P&G has a diverse range of consumer products, including well-known brands like Tide, Pampers, Gillette, and Crest. This diversified portfolio allows the company to generate steady and consistent revenue across different consumer segments, helping maintain a stable cash flow.

Strong Brand Equity

P&G's focus on building and maintaining strong brand equity contributes to customer loyalty. Recognizable and trusted brands often lead to consistent sales, enabling P&G to generate reliable cash flows.

Operational Efficiency

P&G is known for its commitment to operational efficiency and cost management. The company continually seeks ways to optimize its supply chain, manufacturing processes, and distribution channels, reducing costs and enhancing profitability. 

Walmart Inc

Walmart is a multinational retail company based in America founded by Sam Walton. As of today, it has over 10,500 stores throughout the nation, and it comes as no surprise that Walmart is a leader in cash flow management, having to manage such a gigantic inventory of products and systems.

Their success can be attributed to many key factors. First comes Walmart's excellence in inventory management. Processes such as the Just In Time (JIT) system help keep their inventory low without sacrificing product availability.

In addition, Walmart has strategically made use of many short-term, low-risk investments to create additional sources of income, such as those for private-label brands, healthcare services, and customer loyalty programs.

Walmart has also maintained a large amount of liquidity to ensure that its working capital is enough to cover its operational needs. Having a strong working capital is one of the key indicators of a company’s financial health. 

Negative Cash Flow Management Case Study

An example of a negative cash flow case study that cost a company drastically would be the Lehman Brothers, which eventually led to the global 2008 financial crisis. This is the result of bad cash flow management.

The Lehman Brothers' bad investments in the real estate market and subprime mortgages led to their investments going bust when the US housing market was on a downturn. Their lack of liquidity assets and high debt relative to their equity meant that they simply did not have any cash in their bank accounts to bail themselves out.

In this case study, it can be seen that their lack of regulations within their company and financial system led to the collapse of the bank.

Key Business Decisions That Maintain and Increase Cash Flow

Cash flow problems are a common challenge that many founders face during the first 3-5 years of a company’s incorporation. Most companies do not make a profit during the first 3 years of business, and as a result of bad cash flow management, have to close down shop.

Do note that cash flow isn’t the same as profitability. Where cash flow is shown on the cash flow statement, profit is shown on the P&L statement on top of the income statement. If you are running into cash flow problems, a general rule of thumb will be to either increase your revenue or reduce your expenses. Doing both would be ideal. 

Marketing and sales are the language of revenue & having a strong focus on selling more of your products will help maintain a positive cash flow. At the same time, keeping prices competitive and maintaining a low operational cost to the extent that product quality does not suffer is key to a sustainable business.

Robert Kiyosaki made a statement on personal finance management “It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for."  This highlights why understanding financial statements is crucial for any business's success. 

You can have a business that’s cash flow positive yet not be high on profitability. At the same time, you can also have a business that’s high on profitability but low on cash. Knowing the difference will help you make better decisions on what needs to be improved within your company.

With that being said, here are three things you can do to manage your cash flow better.

Keeping Your Financials Organized

When you’re able to see all of your finances in one place, you have access to a detailed view of your income, expenses, and overall financial situation. Using this, you can budget and plan efficiently because of your ability to allocate funds smartly and accurately.

Strategic Focus on Business Development and Sales

Focusing on increasing the volume of goods your company is selling is a great way to increase revenue. By acquiring new customers, you can increase your company's revenue, which will help with business liquidity.

Work With a Qualified CFO

If you’re a business owner, it’s recommended that you understand the basics of cash flow management. However, consider investing in an accountant or CFO who specializes in helping you manage your company’s cash flow.

A CFO can explain to you where you are spending your money and suggest ways you can improve the financial health of your business.

Optimizing Operational Costs, Building Systems, and Processes

Creating systems that optimize internal spending will help for several reasons. The first is increased profit margins. By reducing unnecessary spending, you can help achieve a higher profit margin.

Having a leaner cost structure also provides greater flexibility in having to adapt to various market conditions, such as a recession.

The Bottom Line

Cash flow management is crucial for any business success. Maintaining discipline and strong policies regarding spending is one way to manage cash flow, and another is through the increase of client acquisition activities such as sales, marketing, and business development.

While the strategies are simple in practice, such as reducing unnecessary costs, increasing revenue, and keeping track of your finances, there are also additional factors that determine whether a business has good cash flow management in place, for example, their systems and processes as well as a company's overall direction.

We hope you found this article helpful. If your business operates from Hong Kong, Singapore, or the BVI and you're looking for a virtual business account to optimize cash flow, consider Statrys' virtual multi-currency account.