Cash flow management is an integral part of being in business.

A cash flow budget helps manage borrowings, collection of debtors, payment of employees, creditors and owners, as well as plan for investment spending.

 

Before examining the tools to help manage cash flow we must first understand the difference between profit and loss items (such as income and expenses), and cash flows. While some expenses such as depreciation are non-cash items, the biggest single difference between profit and loss items and cash items is timing. Understanding the timing of cash flows is essential in ensuring the ongoing growth and survival of a business.

 

Cash in a business can get tied up in growth. Working capital is the money that allows the business to trade day to day, and it finances current assets such as stock and debtors. As a business grows there is often a need to finance the increased holdings of stock, as well as the increased level of debtors resulting from increased sales. The business cycle requires balance between cash receipts and payments and should be achieved by actively managing the level of cash in a business.

The tools for effective cash management are as follow.

A credit policy helps to maintain the cash inflows in a business.

It sets the terms by which the business trades with customers and properly documents the contractual relationship. It sets the expected timing for collection of the cash from sales, and enables enforcement to take place if a customer refuses to pay.

An inventory or project management system Effective inventory and/or project management involves control of purchases and management of ongoing inventory and work-inprogress levels. It allows a business to effectively to service customers and to identify and clear slow moving items. Ineffective inventory and project management can result in cash shortages and result in extra costs in financing WIP or holding stock.

 

To ensure proper terms are being negotiated with suppliers and that purchases of both stock and other items are being controlled, a purchasing system should set out responsibilities and guidelines for incurring costs and debt in a business.

The overview tool that can predict cash peaks and troughs and allows a business to plan when extra finance may be needed, a cash flow budget derives from a profit and loss budget adjusted for non-cash items and the difference in timing between:

• cash receipts and payments and;

• income and expense items

The budget should always be rolled forward regularly so that the budgeting period is maintained. Timing of tax payments is a crucial element. Remember profit and loss is an accounting concept. Cash is the real thing!

Maintaining a good business relationship with financier(s) is vital to maintaining flexibility for a business’s cash needs. Businesses rarely trade on the same basis month in month out, and cyclical cash needs are common. A flexible financier who is able to understand and provide for a business’s cash needs on a timely basis ensures smooth cash flow management. A cash flow budget assists greatly in dealing with financiers.

Ineffective cash management can lead to an unexpected cash crisis. Financiers and suppliers are likely to be unsympathetic if poor planning means they are not getting paid on time.

Keeping a cash flow budget up to date is an integral part of being (and remaining) in business.