The complete guide to cash flow management

Managing cash flow is a key piece in the financial management of your business. Having positive cash flow means having more cash coming in from sales and investments than going out in bills and business expenses.

Cash flow management isn’t always easy, though. In this article, we’ll answer all of your questions about cash flow management, and then offer seven tips to help you create an efficient system for your business.

What is the objective of cash flow management?

The main objective of managing cash flow is to make sure that a business has enough liquidity to meet its short-term obligations and operational needs. Positive cash flow means that you have more money coming in than going out, and negative cash flow means you have more money going out than in. The ultimate goal of cash flow management is to maintain a positive cash flow.

By managing cash flows, your business can better plan for the future, seize investment opportunities, and buffer against potential financial setbacks, thus fostering sustainable growth and financial stability.

What’s the difference between cash flow management and cash management?

Cash flow management focuses on analyzing and optimizing a business’s cash flows to ensure smooth operations and meet short-term obligations, involving the timing and amount of money flowing in and out.

Cash management, on the other hand, deals with handling and investing a company's cash to ensure liquidity and maximize returns, which includes choosing investments and managing bank accounts efficiently.

What are the types of cash flows?

The various types of cash flows include:

Cash flows from operations (CFO)

Cash flow from operations (CFO) refers to the income generated through regular business activities such as manufacturing and selling products. This metric is crucial in determining a company's ability to cover operating expenses. In order to keep a business running, there must be a higher amount of incoming cash flow from operations (CFO) than outgoing.

Cash flows from financing (CFF)

Cash flow from financing (CFF) refers to the net flows of cash used to finance the company and its working capital. These cash flow activities can include securing loans, selling stocks, and distributing dividends. CFF gives investors a glimpse into the company's cash reserves and the effectiveness of its financial structure.

Cash flows from investing (CFI)

Investing cash flow (CFI) is a figure that represents how much cash has been generated or spent from investment-related activities in a specific time period.

Common causes of cash flow problems

Cash flow problems can significantly impact a business's ability to operate and grow. Having a good grasp of the main causes of these problems is essential for successful financial management. The following are the primary factors that can lead to cash flow challenges for businesses:

Inadequate sales or revenue

One of the primary causes of cash flow problems is simply not making enough sales or generating enough revenue. Without a steady and sufficient income, a business will struggle to cover its operational costs, such as rent, salaries, and other overhead expenses. Seasonal fluctuations in sales can exacerbate this issue, leading to periods where cash outflows exceed inflows.

Poor management of accounts payable and accounts receivable

Poor management of accounts receivable and payable significantly contributes to cash flow problems. Inefficient receivable practices delay cash inflows by allowing customers to extend payments, while poor payable strategies can either strain supplier relationships or deplete cash too quickly. This imbalance hampers the business's ability to cover operational expenses and invest in growth opportunities, leading to potential cash flow issues.

Excessive inventory

Holding too much inventory ties up cash that could otherwise be used for other operational needs or opportunities. Excessive stock can lead to additional costs for storage, insurance, and potential obsolescence. Your business should balance inventory levels carefully with demand forecasts to avoid unnecessary cash flow constraints.

Overinvestment in fixed assets

Investing heavily in fixed assets such as property, plant, and equipment can also lead to cash flow problems, particularly for growing businesses. While these investments are often necessary for expansion, they require significant upfront cash outlays that may not generate immediate returns. This can strain cash reserves, especially if your business hasn't adequately planned for these expenses.

Inadequate cash flow planning

Insufficient cash flow planning and forecasting is a major contributor to financial challenges. Without clear cash flow projections, it's challenging to make informed decisions about spending, investment, and growth. This can lead to a mismatch between incoming revenues and outgoing expenses, resulting in cash flow shortages.

High debt levels

Relying too heavily on debt to finance operations or growth can lead to cash flow problems, especially if your business faces challenges in generating enough profit to cover debt repayments. High interest and principal repayments can quickly deplete cash reserves, leaving your business’s financial health vulnerable.

What are the components of cash flow management?

Properly managing cash flow is essential for ensuring the long-term viability and prosperity of your company. There are several components involved in cash flow management:

1. Budgeting and forecasting: Develop a cash flow forecast to anticipate inflows and outflows of cash over a specific period.
2. Monitoring collections: Implement a consistent collection process to ensure timely payments from customers.
3. Managing payments: Schedule your payments to align with your cash inflows to maintain a positive cash flow.
4. Controlling expenses: Identify areas for reducing costs without compromising quality.
5. Regular review and analysis: Continually review cash flow statements and compare actuals against forecasts to ensure ongoing positive cash flow.

The 6 steps of cash flow management

1. Monitor your spending consistently

Maintaining a positive cash flow can be a challenge, but it’s necessary. To begin, project your business’s capital requirements and then conduct some basic cash flow analysis by monitoring the amount of cash coming in and going out. It also helps to have the right business financial tools to track these metrics. With automated accounting tools, you can gain real-time visibility on your inflows and outflows of cash, identify any spending issues, stick to your budget, and understand your business’s performance.

The equation is simple. Cash inflows from sales, investments, or other sources are offset by cash outflows such as payroll, marketing expenses, and other capital expenditures. Cash is king for many large or small business owners, and entrepreneurs running startups. According to Harvard Business School: “Having an excess of cash allows the company to reinvest in itself and its shareholders, settle debt payments, and find new ways to grow the business.”

A positive cash flow guarantees that all bills can be paid and that business operations continue without interruption. That said, your business can be profitable without being cash flow positive; conversely, you can have positive cash flow without being profitable.

2. Improve the speed of invoicing and receivables

To improve your cash flow, you need to streamline the invoicing and accounts receivables processes. In short, your goal is to encourage your clients to pay you faster.

For starters, send out invoices immediately after the current billing cycle closes. This gives clients more time to pay. The best-case scenario is to not charge via invoicing that’s paid 30–60 days after a service is rendered (which is essentially just a line of credit). Instead, ask clients to make payments via credit card upfront or by direct debit as part of your payment terms. To further optimize this process:

• When you do send out an invoice, it should be easy to read, clearly show the due dates, and list the terms.
• Use invoice automation and templates, so less time is spent by the accounting and finance teams.
• Make it easier for customers to pay you, i.e., online payments, ACH transfers, checks, and electronic payments.
• Offer marginal discounts as an incentive for clients to make early payments.
• Ask for deposits or partial payments upfront.

Anything you can do to increase the speed at which you receive revenue, the better. The more quickly you receive payment, the more money you’ll have on hand to use as needed.

On the flip side, it’s also critical that you’re monitoring when you pay out vendors. By spreading out your vendor payment dates, you can make sure you’re not paying everyone at the same time each month. This allows you to avoid having a sudden massive cash outflow.

3. Cut expenses

When it comes to cash flow management, tracking your expenses is critical so you can cut unnecessary operational costs for your business. Even if you have massive sales, you can’t let operating expenses get out of hand. Otherwise, if a market shock occurs or costs grow exponentially, you could run into cash flow problems.

To identify areas of spending that can be cut, start by evaluating each department by ROI. From there, turn to hiring practices—are you only hiring when necessary? Once you’ve identified the clear-cut places to reduce costs, consider the less obvious ways a business can improve their long- and short-term cash flow, such as:

1. Review your rent or mortgage for potential renegotiation
2. Consider your travel and entertainment expenses
3. Outsource where possible
4. Cut out discretionary spending

In addition, expense automation can offer high-level and low-level analysis of your various expenses, allowing you to zoom in on where your cash is going on your balance sheet. This makes it easier to control and direct your healthy cash flow toward ROI positive channels.

4. Lease equipment instead of purchasing

All businesses rely on equipment and capital assets to operate. But for some companies, it may be more cost-effective to lease or rent equipment instead of sinking significant capital investments. In addition to the initial purchasing cost, machinery and equipment typically require ongoing repairs, upkeep, and maintenance.

5. Maintain excellent business relationships

Developing great business relationships with clients, vendors, and lenders not only helps your business grow, but in times of tight cash flow, they’ll likely be much more willing to work with you.

Forming good relationships with your customers will encourage them to make on-time payments. You can develop those strong relationships and build trust by maintaining frequent communication and offering excellent customer support.

6. Leverage technology

In the past, keeping tabs on cash flows involved manual accounting-based processes. These were time-consuming, error-prone, and tended to cause frustration for those employees charged with the rote tasks. But monitoring the ledger and managing cash flow doesn’t need to be a demanding process.

Accounting and expense management software can help you create cash flow statements and monitor your cash flow in real time, allowing you to make better, more informed financial decisions. Automation can support invoicing, budgeting, and auditing. This allows you to not only monitor your spending in real time, but also predict recurring expenses to forecast your spending.

Ramp: Making small business cash flow management simple

Staying on top of your cash flow can be tricky when done manually, but automation makes the process much easier.

Ramp is a smart charge card with an integrated, real-time expense management platform that helps you manage your cash flow. You can view your cash balance and stay on top of your cash projections on a daily basis.

Ramp’s mission is to support your business, take away the stress of cash flow management and vendor management, and save you money.