Being an expert at cash flow management takes time. And, it’s often mastered through mistakes. Every business has its own unique qualities so it’s important to thoroughly understand the operations. Cash flow management techniques can vary depending on operations, but you should be confident in the basics. You should also make sure you are working with accurate information. Learning how to manage cash flow is extremely valuable as a business owner or employee. An Intuit study found that 61% of small businesses worldwide struggle with cash flow. While struggling is normal, being unable to pay vendors, loans, and other expenses is not normal. Cash flow issues must be addressed in a proactive manner.
What is cash flow management?
Cash flow management is the process of managing incoming and outgoing, cash and non-cash, flowing in and out of a business. To successfully manage cash flow you will want to know how to analyze transactions and identify opportunities. Essentially, the goal is to optimize the amount of money (or non-money) that you’re working with. You may be wondering how non-cash is part of cash flow management, so let’s take a second to understand. Non-cash items are items on the income statement such as depreciation, deferred income tax, amortization, and so forth. Including these items allows a more accurate view of the financial position of the company. In addition, these items can be used for tax advantages. If you’re in charge of managing cash flow, you’ll need to understand every item involved. Timing will be critical too to ensure that you will have enough cash at all times to cover any expenses. Most small businesses struggle with cash flow challenges. If you’re one of those businesses, dig in and create opportunities to improve financials. Cash flow is never easy, regardless of how much working capital you have.
Why cash flow management is important
Cash flow management is important in businesses, but it’s also important in your personal life too.
A personal life cash flow example is as follows. If your rent is due on the 15th and you get paid on the 20th, this can present a personal cash flow problem. The solution? Acknowledge the dilemma before it’s an issue. Can you push back the due date of your rent? Can you split the payment into two payments?
A business cash flow example is as follows. You need to buy $10,000 of products to sell, but you won’t have enough money until you receive funds from the last batch of products you sold. You can’t let inventory levels get so low that you miss sales, so how will you afford more inventory without the cash? Whether the answer is net-terms or inventory financing, you’ll need to find a solution.
The point here – cash flow management is important to ensure that you have enough funds to cover your bills and expenses while turning a profit at the same time.
How can I manage cash flow effectively?
Managing cash flow effectively starts with implementing processes for operations and collecting information. You must ensure you have the right information and maintain consistency. While you may be in charge of cash flow, you will likely not be the only one involved with activities that impact cash flow. Therefore communicating and following strict processes is important. Let’s take a look at a few ways to manage cash flow effectively.
- Determine forecasting objectives: Forecasting is critical for cash flow management. You need to know how much money you need and when you need it. To forecast, make a simple cash flow forecast. This will include four easy steps; determine how far out you want to plan, identify all income, identify all outgoing accounts, and understand your running cash flow on a daily or weekly basis.
- Choose your forecasting period: A forecasting period goes back to step one of the simple cash flow forecast. How far out do you want to forecast? The most important part of this objective is only forecasting as far out as you can without causing inaccuracy. Well-established businesses will be able to forecast out farther than startups or new small businesses.
- Perform a monthly analysis: Cash flow management will get better with time. It’s important to invest time on a monthly basis to reflect on your forecast versus your actuals. Make adjustments accordingly moving forward.
Advantages of cash flow forecasting
Cash flow forecasting is not an activity that should be optional. The advantages and benefits that forecasting can provide your business are endless. Here are just a few of the advantages that cash flow forecasting can offer:
- Plan for big purchases and investments
- Maintain a track record of on-time payments
- Track overdue payments
- Gain accurate insight to organizational earnings
- Know financial health at any given moment
- Make better business decisions
- Avoid waste of resources and money
- Allows you to see if spending estimates are accurate
- Give investors a clear view of your company’s financial health
- Automate forecasting with software
- Make it easier to see all of your options
- Improve relationship management
Example of cash flow management in business
A simple example of cash flow in a business is a business that sells products to generate income. Revenue from product sales are incoming cash flows. This cash is used to pay employees, cover product costs, and pay for overhead expenses, which are all cash outflow.
In order to keep up with cash outflow, you need to have enough cash coming in at the right times. While you may be planning to receive enough cash to cover outflows, if the timing is off, you’ll have a big problem on your hands. Businesses often solve cash flow timing issues with financing for inventory or a line of credit that they can draw on as needed. Product-based businesses often find much of their cash tied up in products. While products may be selling, income is not received immediately. In addition, you’ll need to tie up the cash again (maybe even before you receive it) in order to keep inventory levels healthy. Inventory financing can be secured through traditional banks and credit unions, but this route is often expensive and hard to qualify for. For these reasons and more, small businesses work with Kickfurther to get funding for inventory.
How Kickfurther can help
Kickfurther is the world’s first online inventory funding platform that enables companies to access funds that they are unable to acquire through traditional sources. For companies that sell physical products or non-perishable consumables and have revenue between $150k to $15mm over the last 12 months, Kickfurther can help. We connect brands to a community of backers who help fund inventory on consignment and give brands flexibility to pay that back as they receive cash from sales. With more than $100 million in inventory funded to date, Kickfurther can help you get funded within a day or even minutes to hours. Companies can easily return to Kickfurther for several rounds of funding. In fact, companies that return after a successful round of funding often receive discounts and increased funding the second, third, or fourth time around.
Closing thoughts
The future success of any business relies on cash flow. Even if a business is not for-profit, cash flow still matters. Everything in life and business costs money, so you’ll need to make sure you have the cash you need to keep operations afloat. One way to assist the financial health of your company is to take advantage of inventory funding. By taking stress off cash reserves you can invest in other areas of your company such as marketing and technology that can help you generate more income. If you’re constantly just barely keeping up, it can be hard to grow past where you are. Therefore, it’s worth it to take on the extra responsibility and costs too for inventory funding. Luckily now, you know just where to go for the best inventory funding option.
Improve the financial health of your business. . . apply for inventory funding today!
