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Cashflow Principles and Management

In the current economic climate, cash flow is more important than ever before in business.

Setting cashflow targets and regularly monitoring your actual cashflow against your forecasted cashflows will enable you to predict large cash outflows and to respond on a timely basis to changes in your business. See below for the principles of keeping cash flowing and the most common causes of poor cash flow management.

Principles of keeping Cash Flowing

  • Without cash, your business will not survive. Cash is the lifeblood of any business. In fact, very profitable businesses can and do fail because of poor cash flow.
  • You need to understand your key cashflow drivers. Key cashflow drivers are the business processes that affect your cashflow.
  • Managing cash flow is all about your business processes. Processes such as how you order stock and pay for it, how you bill for your services, and how you make sure you get paid by your customers.
  • Treating the symptoms of poor cashflow without fixing the underlying causes is time-consuming and frustrating. Inadequate cash flow is a symptom of management problems in a business, NOT the cause.

Six Key Causes of Poor Cashflow

While there are many causes of poor cash flow, these are the six most common causes.

  • A poor accounts receivable process – not invoicing your clients and collecting the money on a timely basis. You could also look at requiring your clients to pay a deposit upfront and then making progress payments as the work is being done.
  • A poor accounts payable process – is purchasing in bulk more cost-effective or is it just as effective to purchase as and when you need to? You could look at negotiating longer payment terms with your suppliers or asking for a discount for prompt payment.
  • Inventory management processes – are you managing the quantities you purchase and only purchasing things you can on-sell or use in the business on a timely basis. Having too much inventory on hand ties up funds that could be used elsewhere.
  • Inappropriate debt/capital structure – not having enough working capital to assist you through the normal business cycles.
  • The business overheads are too high.
  • The Gross profit margins are too low.

Forecasting your cash flow gives you a clearer overall picture of your business and how the money moves into and out of it. It provides important insight into your company’s financial health.

If you have not done cashflow forecasting before, there is no better time to start than now. This will give you a better understanding of your company’s finances which will allow you to be better prepared for the future.

Please contact us if you have any queries.

Nileshni Prasad