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Money Management in Business

Updated on May 19, 2012

Cash flow in business

Cash is the lifeblood of business, and especially small business. Your company's profit or loss at the end of the year is one thing, but if cash is not coming in and out at the right times during the year, you will find yourself struggling sooner or later.

Inadequate cash flow management will significantly reduce your growth potential and long term prospects. It will limit your options and make the job of running your business far more difficult than it needs to be.

Following a few simple principles will make a big difference in your cash flow.


Cash flow principles

Cash flow management basically comes down to two things:

1. Amount--how much money is coming in and going out

2. Timing--when is the money coming in and going out

It is really that simple. If you can master these two areas, and how they interact with each other, you will probably not have any cash flow problems for a long time.

Cash coming in and going out

Part of improving your cash situation is to critically examine everything you spend money on. You should be able to summarize very easily how each payment, large or small, helps your business and furthers your financial objectives.

Improving a company's cash flow situation often comes down to managing expenses. Expenses, unlike revenue or sales, are 100% within your control. You don't have to spend money on anything you don't want to, and nobody else has the power to determine your costs. This is why expense management can be so powerful. Making the effort to find cheaper vendors, or detecting wasteful spending can pay great rewards.

Sometimes your answer for improved cash flow is in revenue. Sales and income is a very large topic, too large to cover here, but you can use your accounting data to begin to get an idea of your strongest and most profitable products and services. You can also look into new markets and new sales opportunities in addition to capitalizing on existing customer relationships. Consider any seasonal or cyclical variations in customer activity that may have an impact on your cash flow during the year.

Timing of cash flow

In many ways, cash flow management can be thought of as "managing for profit over the short run." You want to be receiving more money than you are paying out over the short term, whether that is on a daily, weekly or monthly scale.

Timing your payments and receipts just right is extremely powerful. Delaying a $10,000 payment by just 30 days can make a big difference, if you can expect $15,000 to come in from your receivables during those 30 days. You will then be able to have at least a few thousand dollars in working capital over the course of the month, rather than be $10,000 poorer now, and spend the rest of the month scrambling to keep your head above water.

It is the same amount of money in and out, but the timing makes the difference between running your business, and running from your business! At the end of the year, you probably won't even remember that 30-day period. But at least you will be able to make it to the end of the year.

Planning and projecting

Managing cash flow also means using accurate projections of revenue and expenses to make plans.

Accurate projections require full, detailed knowledge of past cash flow (how much was received, how much was paid, and what was the timing), and as much information as possible about future conditions. Any changes on the revenue and expense sides that are expected in the coming weeks or months should be incorporated. New hires, large purchases or investments, new contracts or other transactions will affect your cash flow planning.

The easiest part of cash flow projection is recurring payments and recurring orders. These kinds of transactions can be predicted more or less perfectly as far into the future as necessary.

Improving cash flow

A number of steps can be taken to improve cash flow, including:

  • Setting up a more favorable payment plan with vendors
  • Incentivizing customers to pay sooner rather than later
  • Using credit in a responsible way to make purchases, instead of cash
  • Discounting products or services to make some quick cash
  • Offering additional or complimentary services to increase the likelihood of new purchases
  • Selling off or renting assets
  • Reducing receivables by applying stricter credit terms with clients

Effective cash flow management may be difficult at times, but it can make the difference between a failed business and a successful one. The proper combination of principles, planning, projection and practice will improve your cash profile.


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